As of 05/23/2024
  Indus: 39,065 -605.78 -1.5%  
  Trans: 15,009 -185.73 -1.2%  
  Utils: 924 -20.84 -2.2%  
  Nasdaq: 16,736 -65.51 -0.4%  
  S&P 500: 5,268 -39.17 -0.7%  
YTD
 +3.7%  
-5.6%  
 +4.8%  
 +11.5%  
 +10.4%  
  Targets    Overview: 05/13/2024  
  Up arrow41,000 or 38,500 by 06/01/2024
  Up arrow16,050 or 15,300 by 06/01/2024
  Up arrow960 or 900 by 06/01/2024
  Up arrow17,250 or 15,850 by 06/01/2024
  Up arrow5,500 or 5,100 by 06/01/2024
As of 05/23/2024
  Indus: 39,065 -605.78 -1.5%  
  Trans: 15,009 -185.73 -1.2%  
  Utils: 924 -20.84 -2.2%  
  Nasdaq: 16,736 -65.51 -0.4%  
  S&P 500: 5,268 -39.17 -0.7%  
YTD
 +3.7%  
-5.6%  
 +4.8%  
 +11.5%  
 +10.4%  
  Targets    Overview: 05/13/2024  
  Up arrow41,000 or 38,500 by 06/01/2024
  Up arrow16,050 or 15,300 by 06/01/2024
  Up arrow960 or 900 by 06/01/2024
  Up arrow17,250 or 15,850 by 06/01/2024
  Up arrow5,500 or 5,100 by 06/01/2024

Bulkowski on the Bearish Butterfly Pattern®

Revised on 6/29/18. Statistics updated on 8/28/2020.

This article describes my analysis of the bearish butterfly pattern as described by publicly available information and common sense rules to determine valid patterns. Additional rules may or may not improve performance. I tested the pattern using only the below identification guidelines.

The bearish butterfly
Bearish Butterfly

 

Important Results for the Bearish Butterfly

Overall performance rank for downward moves (1 is best): 4 out of 5 (versus other Fibonacci patterns, only)
Break even failure rate: 27%
Average drop: 13%
Percentage reversing at point D: 86%

The above numbers are based on over 1,000 perfect trades in bull markets. See the glossary for definitions.

Bearish Butterfly Identification Guidelines

CharacteristicDiscussion Butterfly retraces
The Bearish Butterfly Retraces
XABPrice drops from X (see figure on the right, not drawn to scale) to valley A, then retraces up to B. The BA retrace of XA measures 78.6%.
ABCPrice retraces from valley A to peak B then drops to C. Retrace BC as a function of BA should be a Fibonacci ratio between and including 38.2% to 88.6%. I list the qualifying ratios in the chart.
BCDAfter peaking at B, price drops to C followed by an extension to D. The DC/BC extension measures one of the Fibonacci ratios from 161.8% to 224%.
XADThe extension AD as a percentage of XA is 127 but I allow plus or minus 3 percentage points (124% to 130%) of this to qualify.

The bearish butterfly pattern follows the ratios listed in the figure and as described in the above table. You'll need a computer running pattern finding software to locate them.

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Bearish Butterfly Trading Tips

Trading TacticExplanation
FibonacciUse the length of the XA move to help predict the price at which the stock will turn at D. AD should be 1.27 times as long as XA.
ShortOnce price turns at D, short the stock. Because this pattern has such a high failure rate, I don't suggest shorting a stock only because it shows a bearish butterfly. Find other reasons why you think the stock will drop. However, 86% will turn lower at D.
StopUse a close above D as the stop location.
Measure RuleAfter price peaks at D, price drops to A 24% of the time, to B 76% of the time, and to C 38% of the time. You can use those percentages as targets.

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Bearish Butterfly Trading Example

Butterfly chart pattern trading example

Let's take a look at a trading example.

I show the butterfly on the daily chart of Teva Pharmaceutical. X is at 32.48-31.72, A is at 28.49-27.60, B is at 31.83-30.36, C is 30.93-30.03 and D is 33.82-32.18, high to low, respectively on the peak or valley. Price reaches the low (L) on 9/6/2017 at 15.22, for a drop of 55% below the high at D.

The AB retrace of XA should be 78.6%. I found the high-low range at peak B includes the 78.6% value, so I count it as a valid retracement.

For the math, using the high at X and low at A, high at B and low at A gives (31.83 - 27.60)/(32.48 - 27.60) or 87%. Using the low at B changes the answer to 57%. Because the high-low range on the price bar at peak B includes the 78.6% ratio, I accept that the price bar at B includes the correct Fibonacci retracement for the butterfly.

I use the same methodology for the other ratios: BC/BA, DC/BC. Ratio DA/XA must be within 3 percentage points of the target which it is exactly in this example. That is, DA/XA = (33.82 - 27.60)/(32.48 - 27.60) or 127%.

I tried other methods to identify the Fibonacci turns, but this high-low range worked best and it makes intuitive sense. So that's what I used for all butterfly recognition selections.

Would you be able to spot this as a butterfly if the labels were not attached?

Price makes a strong push downward, bottoming at L.

-- Thomas Bulkowski

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See Also

 

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