As of 09/28/2022
  Indus: 29,684 +548.75 +1.9%  
  Trans: 12,457 +303.78 +2.5%  
  Utils: 945 +10.61 +1.1%  
  Nasdaq: 11,052 +222.14 +2.1%  
  S&P 500: 3,719 +71.75 +2.0%  
YTD
-18.3%  
-24.4%  
-3.7%  
-29.4%  
-22.0%  
  Targets    Overview: 09/15/2022  
  Up arrow32,000 or 29,200 by 10/15/2022
  Up arrow13,800 or 11,800 by 10/15/2022
  Up arrow990 or 900 by 10/15/2022
  Up arrow11,975 or 10,700 by 10/15/2022
  Up arrow3,800 or 3,500 by 10/15/2022
CPI (updated daily): Arrows on 9/28/22
As of 09/28/2022
  Indus: 29,684 +548.75 +1.9%  
  Trans: 12,457 +303.78 +2.5%  
  Utils: 945 +10.61 +1.1%  
  Nasdaq: 11,052 +222.14 +2.1%  
  S&P 500: 3,719 +71.75 +2.0%  
YTD
-18.3%  
-24.4%  
-3.7%  
-29.4%  
-22.0%  
  Targets    Overview: 09/15/2022  
  Up arrow32,000 or 29,200 by 10/15/2022
  Up arrow13,800 or 11,800 by 10/15/2022
  Up arrow990 or 900 by 10/15/2022
  Up arrow11,975 or 10,700 by 10/15/2022
  Up arrow3,800 or 3,500 by 10/15/2022
CPI (updated daily): Arrows on 9/28/22

Bulkowski on Busted Patterns

Updated with new statistics 9/21/2020.

My paperback book, Getting Started in Chart Patterns, Second EditionGetting Started in Chart Patterns, Second Edition book., pictured on the right, devotes a chapter to busted chart patterns (beginning on page 225, in case you have a copy laying around). I include updated performance statistics and the presentation discusses 18 busted chart patterns.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Busted chart patterns occur when the breakout is in one direction, but price does not travel far before reversing and breaking out in the new direction. The new direction often marks a powerful move.

Let's take a closer look at one variety of busted chart patterns: the Adam & Adam double top

The Adam & Adam Double Top

A picture of a busted double top in American Superconductor.

I show a chart of American Superconductor on the daily scale.

Pictured is an Adam & Adam double top. Click the link to discover the differences between the variations of Adam and Eve types, but for now, that's not important. What is important is that a double top is just squiggles on a screen until price closes below the low posted between the two peaks. I show that as point B. When that happens, called confirmation, it turns the squiggles into a valid double top. And that means price is going down.

Or does it?

In this example, price does drop but not far. In fact, it moves horizontally for about a week and then begins rising. When price closes above the top of the chart pattern at A, it busts the double top. And that often means price is going to make a strong move up, a portion of which we see in the chart.

In this example, the stock gapped higher after the release of quarterly earnings. Don't get too excited about this stock because it could round over in a another week or so. Why? See the event pattern cleverly called good earnings surprise.

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Busted Double Top

The chart pictured above is an example of a busted double top. I define a busted pattern as one that breaks out in the expected direction, moves no more than 10% in that direction before reversing. Then, price shoots out the other side of the pattern. When that occurs, it busts the pattern, often setting up for a strong move.

The 10% number is arbitrary. You can use anything you wish, but for testing purposes, I limited the original breakout move to 10% with no time limit.

The breakout can be either up or down, but downward breakouts that bust are the ones to trade. Why? Because price has unlimited room to move to the upside, so you can make an infinite amount of money. After an upward breakout, when price busts the pattern downward, you can only lose 100% of your money and no more. Thus, the downside is limited in comparison.

For more information on busted chart patterns, included updated performance statistics, visit the See Also links below.

Performance

A busted double top is similar to a regular double bottom. In both cases, price rises. Does one outperform the other? Let's take a look at the statistics.

Chart Pattern  Average  
Rise
  Busted  
Rise
Winner
Non-busted Adam & Adam double bottom/busted double top 39%37% Non-busted 
Non-busted Adam & Eve double bottom/busted double top43%52%Busted
Non-busted Eve & Adam double bottom/busted double top42%51%Busted
Non-busted Eve & Eve double bottom/busted double top50%54%Busted
Ascending triangles43%51%Busted
Descending triangles38%54%Busted
Symmetrical triangles34%52%Busted

The table shows that in three of four double bottoms, the busted double top performs better. Please note that this assumes the chart pattern single busted and all numbers are from bull markets only.

The last three entries in the table show the performance of three types of triangles. For example, ascending triangles with upward breakouts see price rise an average of 43%. When a downward breakout from the triangle single busts, price rises an average of 51% above the top of the chart pattern. The busted pattern outperforms.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notices: "As an Amazon Associate I earn from qualifying purchases." Paid links).

My novels:  Bedroom to Boardroom book Remember Me book Bumper's Story book Head's Law book
My stock market books:  Chart Patterns: After the Buy Getting Started in Chart Patterns 2nd edition book Trading Basics book Fundamental Analysis and Position Trading book Swing and Day Trading book Encyclopedia of chart patterns book Encyclopedia of Chart Patterns 3rd Edition book Trading classic chart patterns book

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