As of 04/19/2024
Indus: 37,986 +211.02 +0.6%
Trans: 15,084 +136.79 +0.9%
Utils: 876 +15.31 +1.8%
Nasdaq: 15,282 -319.49 -2.0%
S&P 500: 4,967 -43.89 -0.9%
|
YTD
+0.8%
-5.1%
-0.7%
+1.8%
+4.1%
|
 39,800 or 37,150 by 05/01/202416,200 or 15,000 by 05/01/2024885 or 850 by 05/01/202416,700 or 15,800 by 05/01/20245,250 or 5,025 by 05/01/2024 |
As of 04/19/2024
Indus: 37,986 +211.02 +0.6%
Trans: 15,084 +136.79 +0.9%
Utils: 876 +15.31 +1.8%
Nasdaq: 15,282 -319.49 -2.0%
S&P 500: 4,967 -43.89 -0.9%
|
YTD
+0.8%
-5.1%
-0.7%
+1.8%
+4.1%
| |
|
39,800 or 37,150 by 05/01/202416,200 or 15,000 by 05/01/2024885 or 850 by 05/01/202416,700 or 15,800 by 05/01/20245,250 or 5,025 by 05/01/2024 | ||
My book,
Encyclopedia of Chart Patterns Second Edition
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I wrote this article for Active Trader magazine in September 2005 as part six of a series. They accepted it for publication, but never printed it nor paid for the work to write it (no kill fee).
Insert your favorite expletive. 
So, I am posting the full article here.
This month's chart pattern review covers pipes, pennants, and rectangles such as those shown in the above figure. Pipes are the new kid on the block. Few know of pipes, but they are near the top of the performance list. Pennants are the workhorses of the day trader. They appear most often in strong price trends, enticing traders to jump on board and surf the momentum wave. Rectangles are rarer than many people think and performance ranges from mediocre to downright awful. However, each of these chart patterns has its uses. Here's what to look for when trying to identify and trade them.
Pipes are handy tools for the swing trader. Look for two adjacent and upward price spikes like that shown in the figure.
The two spikes should be longer than similar spikes over the prior year and should have a large price overlap between them. Pipes need not top out at the same price either, but the difference is usually less than 35 cents. A pipe top confirms as a valid chart pattern when price closes below the lowest spike in the two-week pattern.
The best performing pipe tops occur when price retraces after a short-term downtrend, like that shown in the right half of the figure. At the top of the upward retrace, a pipe signals a resumption of the downtrend. Beware pipes that appear after a prolonged downtrend (over three months long; the longer the downtrend, the worse the likely performance). The pipe may predict a reversal.
A pipe top appearing in a long-term (over six months) uptrend may not signal a sustained reversal for several months (two to five). Nevertheless, these types of pipes mark short-term reversals that can spell profitable moves for swing traders. When price closes below the pipe low, then consider shorting the stock.
The figure shows a pipe bottom. Pipe bottoms are inverted pipe tops. Look for pipe bottoms on the weekly chart for the best performance, although they appear on other time scales as well.
The two spikes should be adjacent and point downward, plunging well below the surrounding price action. The spike length should be longer than the average spike over the prior year. The longer the spike the better the average performance after the breakout. The two spikes should have a large price overlap between them. Use your best judgment as a guide. The pattern confirms when price closes above the highest spike in the pair.
The left pipe bottom shown in the figure is not a pipe because price doesn't confirm the chart pattern (price doesn't rise above the highest high in the pattern) before price closes below the lowest low. The pipe bottom on the right confirms at the price shown because price closes above the taller of the two spikes.
Trading is similar to pipe tops only inverted. In an upward price trend, price retraces a portion of the uptrend and then forms a pipe bottom. When the pipe confirms, buy. Pipes also appear at the end of downtrends. They often signal timely and lasting reversals.
After a pipe bottom, price sometimes retraces and drops slightly below the pipe bottom (by less than half a point or so) before resuming the new uptrend. Don't put your stop loss order too close to the pipe bottom, or you may be stopped out.
The figure on the left shows three varieties of pennants in an uptrend. The first (A) is unusual because price tilts in the direction of the prevailing uptrend. This variety of pennant resembles a small rising wedge.
Type B is more common than A, but it is still rare. Price forms lower peaks and higher lows, appearing as a small symmetrical triangle.
Pattern C is what you usually find in a strong uptrend. Price pauses and forms a small falling wedge. Notice that the two trendlines slope against the prevailing price trend.
The next figure (lower right) shows another set of pennants, but these are in a downtrend. Variety G looks like a small symmetrical triangle. Type H is the most common of the three forms. The pennant swings against the prevailing price trend. Variety I is rare because the swing follows the price trend. Type I is rare.
When trying to identify a pennant, look for a flagpole upon which the pennant hangs. The pole should be a swift price move, a straight-line run. Avoid trading pennants without a decent sized flagpole because the following move may be disappointing.
Pennants are short patterns, less than three weeks long. Pennants longer than that are better classified as symmetrical triangles, rising or falling wedges. Volume usually trends downward in the pennant until the breakout.
Pennants are half-staff chart patterns since they often appear midway in the price move. To determine a price target, consider pennant G in the figure.
Measure the straight-line run leading to the pennant from the swing high at D (the trend start) to the bottom of the pennant at E. Project the distance downward from the high price at point F.
Unfortunately, price will often fall short of the target using this method. For uptrends, price hits the target 60 percent of the time and for downtrends, price hits just 51 percent of the time. When selecting a price target, be conservative and look for nearby support zones where price is likely to stall or reverse. One key performance tip is that tight pennants perform better than loose ones. Pennants G and I in the figure are tight; H is loose.
The next figure shows a rectangle top. It differs from a rectangle bottom by the direction price enters the chart pattern. For tops, price enters the pattern from the bottom but can exit in any direction. The distinction between tops and bottoms is an arbitrary one done to gauge performance of the two types. Rectangle tops perform best in a bull market with a downward breakout. Rectangle tops in a bear market with an upward breakout are the worst performing chart pattern out of 19 chart pattern types studied.
Look for price that moves horizontally, bouncing between two nearly parallel trendlines. Price should touch each trendline at least twice in distinct minor highs (top trendline) and minor lows (bottom trendline). Volume usually trends downward throughout the chart pattern.
To determine how far price is likely to move after the breakout, use the height of the rectangle and project it in the direction of the breakout. For example, if the top trendline is at 15 and the bottom one is at 12 with an upward breakout, the target would be 18 (15 - 12 + 15). A downward breakout target would be nine (12 - (15 - 12)). Look for nearby support and resistance zones because this method works between 60 percent and 80 percent of the time.
If the rectangle is tall enough, try an intrapattern trade. Buy as price rebounds off the lower trendline and hope for an upward breakout. If price touches the top trendline and turns, then reverse your position (go short).
Like broadening chart patterns, rectangles have partial rises and declines that correctly predict the breakout. The figure shows an example. Price touches the top trendline then drops down but does not come close to the bottom trendline before turning. A partial decline correctly predicts an upward breakout 89 percent of the time.
A partial rise is similar only price rises off the bottom trendline before retracing and staging a downward breakout. A partial rise correctly predicts a downward breakout 61 percent of the time.
Rectangle bottoms are a lot like their top brothers except price enters the chart pattern from the top. The exit can be in any direction. The next figure shows an example. Look for price to bounce between two near parallel trendlines, touching each trendline at least twice in distinct minor highs and minor lows. Volume trends downward.
Trading rectangle bottoms is similar to rectangle tops except the bottom variety shows better overall performance. If the rectangle is tall enough, buy near the bottom trendline and sell or sell short near the top trendline.
If a partial rise or decline occurs, consider taking a position in the stock, anticipating a downward or upward breakout, respectively.
The measure rule for rectangle bottoms is the height of the rectangle projected in the direction of the breakout. Depending on market conditions (bull/bear) and breakout direction, the measure rule works between 50 percent and 85 percent of the time. If you see nearby support and resistance zones, then price may stall there.
Pipes, pennants, and rectangles tell a story to any trader willing to listen. The story may include the breakout direction and how far price is likely to move after the breakout. Listening and acting upon the story price is telling often leads to a profitable trade.
-- Thomas Bulkowski
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