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Written by and copyright © 2005-2010 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 950-964. That chapter gives a complete review of the chart 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.
A stock rating upgrade by a broker is a bullish event, but only for a time. Price may breakout upward but it soon collapses. Discovered by Thomas Bulkowski in the fall of 2003.
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Stock Rating Upgrade Pattern
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 2 out of
6; 5 out of 5 (worst)
Break even failure rate for up/down breakouts: 18%; 38%
Average rise/decline: 24%; 12%
Throwback/pullback rate: 63%, 37%
Percentage meeting price target for up/down breakouts: 81%, 67%
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Identification Guidelines
| Characteristic | Discussion |
| Announcement | A broker publicly upgrades the stock. |
| Wide swing | Look for announcements in which price makes a large intraday swing, 2 or 3 times the average daily intraday price swing over the last month. |
| Upward breakout | The breakout is usually upward, and it occurs when price closes above the high made on the announcement day. |
| Downward breakout | Downward breakouts occur when price closes below the announcement day’s low. |
| Volume | Heavy on the announcement day. |
| Behavior | For upward breakouts, price rises, rounds over, and then declines. For downward breakouts, price drops but pulls back almost half the time. |
Trading Tips
Do not trade this in a bear
market; it’s the worst performing event pattern. Upward breakouts see price
rise but only for a time. Downward breakouts
have a tendency to bottom in less than 2 weeks, so they are not good short
candidates either.
| Trading Tactic | Explanation |
| Measure rule | See the Measure Rule figure to the right. Using the announcement day, subtract the intraday low (point B) from the high
(A) and multiply the difference by the above “percentage meeting price target.” Add the result to
the intraday high (A) for upward breakouts, or subtract it from the intraday low (B) for downward
breakouts to get a price target (C, shown for upward breakouts only). |
| Confirmation | Price confirms the pattern when
it closes above the announcement day high, or closes below the announcement day low. Wait for price to confirm the pattern
because the breakout can be in any direction. |
| Buy | After a downward breakout, price should bottom and then begin moving up. When that happens, buy, but be aware that it may be a pullback and price may
tumble once the pullback completes. |
| Sell | After an upward breakout, price peaks and turns down. If that happens, sell or sell short. |
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 The Measure Rule
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Example
The above figure shows an example of a stock rating upgrade event pattern. On August 9, a broker raised its rating
on the stock. The stock closed above the intraday high posted on the day of upgrade 3 days later, signaling an
upward breakout. Price rounded over and headed lower, bottoming 22% below the close on the upgrade day.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Chili: It’s not just for breakfast anymore!
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