Encyclopedia of Chart Patterns. Thomas N. Bulkowski
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I'm describing is an example of a double busted big M. Those are nasty for shorts unless they time it right. How do we play this scenario? Price closes above the top of the big M, busting the downward breakout and then reverses to head back down. That's the time to short.
Finally, in a number of cases, I saw a large gap open as price climbed up to the big M (during the BC rise). The top of those gaps supported price on the way down, so they make for a good price target.
Table 6.11 shows information that I mentioned previously but decided to put in a table for your viewing pleasure.
Table 6.11 Special Features
| Description | Bull Market | Bear Market |
|---|---|---|
| Higher left peak, performance | 16% | 22% |
| Higher right peak, performance | 17% | 22% |
| Even peak, performance | 18% | 19% |
| Median days from launch price to left peak | 27 | 23 |
| Median days from right peak to ultimate low | 49 | 40 |
Higher peak performance. I looked at performance based on which peak of the big M was above the other (or even). In bull markets, a higher right peak suggests better performance. I would have guessed that a lower right peak would suggest a weak situation, but maybe a higher peak means there's farther to drop.
Time to drop. I measured the median time to rise from the launch price to the first peak compared to the drop from the right peak to the ultimate low. The time is about two to one. So you can measure the time from the move up to the first peak, double it, and that will give you an estimate of how long you'll need to remain in the trade to reach the ultimate low. My guess is it won't be that easy, but at least you'll have an estimate.
Sample Trade
Justin is an experienced trader, and he's shorted enough stocks to become proficient at it. “I got interested right there.” In Figure 6.4, he pointed to the strong drop the day after peak E and made plans to trade the big M (the twin peaks at C and E).
Figure 6.4 Justin shorted this big M and lost money on the trade.
Price started a concerted effort to climb when it broke out of a congestion region at B. Price paused at H and moved sideways for a time when it hit overhead resistance set up by the sideways move from August to November 2017 (shown by a horizontal line connecting circle H).
He checked a wider view of the chart to see where support and resistance were located. The daily chart showed a ceiling of overhead resistance blocking an advance higher (line A). Price at the top of the big M, peaks C and E, smacked against that resistance and ducked.
“I checked the weekly chart going back to 2015, but didn't see much support between D and H. But look at H. It's tight with lots of overlap as price moves sideways. Very nice.” A loose‐looking congestion region has price meandering all over the place, but H looked different. “H is my target. I think the stock will drop that far.”
“What about the knot at I?” I asked and circled it on the chart. “It'll support price. It's an energy barrier. When Chakotay and Seven hit one, they crashed. You don't want that to happen.”
He made a funny face.
“It's from Star Trek: Voyager.”
“I like football, baseball, and soccer: any sport with a ball.”
I wondered how he felt about polo, but decided not to ask. I pointed to I again.
“It's too close to the breakout. The stock will blow right through that without pausing and head down to H. Trust me. I do this for a living. I know what I'm talking about.”
My face didn't move a muscle, but inside I grinned and thought that his money was about to become someone else's.
He used the measure rule to determine how likely it would be for price to reach H. The top of the pattern is at C, 24, and the bottom is at D, 20.60, for a height of 3.40. The top of the region at H is at 14.50, or 1.75 times the height of the big M below the bottom of it.
From Table 6.10, he calculated a 48% chance of reaching point H by interpolating the numbers of 55% (.55) of patterns reaching the target using the full height, and 26% (.26) of them using the 2× height. That is, .26 + (.55 – .26) × .75 = 48% chance of the stock dropping to H. The .75 number is 75% of the distance from 1 to 2, which is where H (1.75 times the height) sits.
How did he feel about a 48% chance of success? He looked at me and cocked an eyebrow. “Yuck,” he said.
For grins, he computed the height of the big M (3.40) and divided it by the breakout price (20.60) to get a value of 16.5%. According to Table 6.5, the pattern was tall, making him feel better. He considered B to be the launch price, and Table 6.10 said there was a 52% chance of reaching it (the last line in the table).
The two values were different: a 48% chance of reaching H and a 52% chance of reaching B, which was further away. Hmm. Maybe a subspace anomaly would be involved. I didn't say anything to Justin because a ball wasn't involved.
He had an order to short the stock if it dropped a penny below the low at D, or 20.59. He placed an order to cover the short at 17.03 (his target), above the top of the region at H, and above round number support at 17. Once the short triggered to open the trade, he placed a stop to exit the trade should price rise a penny above C, or 24.01.
Then he sat back and watched disaster unfold. The stock broke out downward at F, placing him in the trade, and it hit the energy barrier at the price of I. As I left his house, I started whistling the Voyager theme song.
The stop covered his position at G for a loss of 3.42 a share, not including commissions.
What did Justin do wrong? I think he should have anticipated a pullback at the energy barrier (the knot at the price of I). After that, though, I would have expected the stock to resume the downward move to H. Table 6.4 says that 60% of the time, price does resume the downward move. Fortunately he had a stop in place to protect his backside while he waited for the Voyager crew to rescue him.
7 Big W
RESULTS SNAPSHOT
Appearance: Price forms twin bottoms at or near the same price with an unusually tall left side, often looking like a big W.