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Written by and copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 880 to 892. That chapter gives a complete review of the event pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
When the FDA approves a drug and
it's announced to the public, price can breakout in any direction, but the
probabilities say that price will trend down
soon after. This event pattern isn't worth trading because it has such poor performance.
Discovered by Thomas Bulkowski in the summer of 2003.
Ideal FDA Drug Announcement Pattern
Important Market Results for Upward Breakouts, FDA Drug Approvals
Overall performance rank (1 is best): 6 out of 6
Break even failure rate: 34%
Average rise: 20%
Throwback rate: 61%
Percentage meeting price target: 81%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
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FDA Drug Approval Identification Guidelines
| Characteristic | Discussion |
| Announcement | News outlets report that the FDA has approved a drug. |
| Wide swing | Look for announcements in which price makes a large intraday price swing, preferably 2 or 3 times the average intraday range over the last month. |
| Yearly high | For best performance after an upward breakout, select announcements that occur within a third of the yearly high. |
| Upward breakout | A breakout occurs when price closes above the high posted on the announcement day. |
| Volume | Select patterns with heavy announcement day volume, above the 30-day average. |
FDA Drug Approval Trading Tips
Although I don't recommend
trading this event pattern, there is an inverted J-shaped pattern (inverted and descending scallop) that shows
promise. The following (except the measure rule
which refers to all upward breakouts) pertains to that situation. A study of the
pattern reveals that price declines an average
of 29% in 86 days after an upward breakout.
| Trading Tactic | Explanation |
| Measure rule | Compute the height (intraday high minus the low) on the announcement day and multiply it by the above
"percentage meeting price target." Add the result to the intraday high to get a price target. |
| Inverted J-shape | For upward breakouts, look for a price pattern that is an inverted J-shape. Price moves up following a trend, rounds
over, and heads back down. The figure to the right shows what this pattern looks like. |
| Price rise | After the breakout, price rises between 3 and 6 weeks before beginning to slide. Ignore patterns outside that time limit. |
| Trendline | Price follows a trend moving higher. A trendline drawn along the bottom of that price trend, when pierced by
moving lower, is the sell or sell short signal. The ideal figure near the top of this page shows an example. |
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 Inverted J-Shape
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FDA Drug Approval Example
The above figure shows an example of what happens sometimes when the FDA approves a drug. News reports indicated
that the company and its partner received approval to sell Abilify in the U.S. Price gapped up on the news and a nice
rise followed. However, within a few weeks, the stock was moving down again, bottoming in March.
-- Thomas Bulkowski
Copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved. A fool and your money are soon partners.
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