Two Patterns You Never Heard of: Throwbacks and Pullbacks
Throwbacks and pullbacks are not new to securities, but if you don't
understand how price behaves, a losing trade may result.
Figure 1 shows an example of a throwback. Price forms a symmetrical triangleby bumping up against overhead resistance highlighted by a down-sloping
trendline and finds support along the bottom of the pattern, shown by a rising
trendline. The two trendlines converge sometime in the future at the triangle
apex.
A breakout from the symmetrical triangle occurs when price closes outside of
the trendline, not just pierces it. I show the breakout as point A in the
figure. Price moves up for three days and then begins retracing the move,
eventually bottoming at B. The looping action completes the throwback. Price
Before we get to statistics, what should you look for in a throwback?
Throwbacks regularly occur after the breakout from chart patterns, which are
areas of congestion or sideways price movement. Most often, throwbacks occur
after a high volume breakout. Price climbs upward for several days before
rounding over and returning to the breakout price or chart pattern, leaving
white space in the looping action (see Figure 1). The white space requirement
separates a throwback from price sliding along the trendline. Finally, price
must complete the return trip to the breakout within a month or else it's not a
throwback.
Figure 1: A throwback after an upward breakout from a symmetrical triangle.
Statistics
I looked at 12,256 chart patterns of various types and found that 53 percent
had throwbacks. Price rises for an average of three days after the breakout
before the turn begins. During that time, the most likely gain is six percent to
eight percent (found using a frequency distribution), but the average gain is
ten percent. By the tenth day after the breakout, on average, price has returned
to the breakout point. In 86% of the cases, price resumed the uptrend after
that.
There are a few important points to remember here.
1. Do not panic when price begins turning down after the breakout. Once the
throwback completes, there is a very good chance that the upward move will
resume.
2. If you are a nimble trader, you can buy at the breakout and sell when
price peaks several days later. Then buy back in once price resumes trending
upward after the throwback ends.
3. If you see a breakout with unusually high volume, meaning that volume is
above the 30-day average, then price will throwback 70 percent of the time.
That's useful information in planning your trade.
4. Finally, not all throwbacks end at the breakout price or chart pattern
boundary. Fourteen percent continue dropping below the bottom of the pattern.
Pullbacks
Pullbacks are similar to throwbacks because it's the same pattern flipped
upside down. Figure 2 shows an example, but this time, price plunges down from a
large descending triangle. A descending triangle chart pattern has a flat base
and down-sloping top trendline. The breakout is downward 64 percent of the time.
I show the breakout at point A. The pullback completes when price climbs to
B, the bottom of the triangle, but look what happens. Price continues moving
higher, eventually topping out at C before jumping on the sled and sliding
downhill again.
Figure 2: A pullback occurs after a downward breakout from a descending
triangle.
I examined 10,878 chart patterns and found that the pullback rate was 56
percent. That means 44 percent did not return to touch the chart pattern
boundary or the breakout price within 30 days. If it did return to the breakout
after that, it still does not count as a pullback. This is an arbitrary limit,
but one commonly recognized. Usually, a pullback occurs quickly. In fact, it
takes just three days for price to reach bottom, on average. During that time,
the decline is most likely four to ten percent, spread evenly, but the average
is nine percent. After that, the long struggle back to the breakout begins. It
breakout, the same as in a throwback. Just 13 percent continue to rise above the
pattern. That means the other 87 percent resume the downward plunge.
For traders, both throwbacks and pullbacks are significant developments.
Imagine shorting the stock at the bottom of Figure 2 just before a pullback
begins. Many novice traders will panic when faced with an uptrend in a short
position. However, with patience and a bit of luck, the downtrend will resume
and you'll soon be in the money again. In a small number of cases, you'll be
taken to the woodshed, and that's what makes trading interesting.
Thomas Bulkowski is a private investor
with over 25 years of experience and author of several books including the
best-selling, Encyclopedia of Chart Patterns, Second Edition (John Wiley & Sons,
2005), Getting Started in Chart Patterns (Wiley, 2006), and Trading Classic
Chart Patterns (Wiley, 2002). His latest book, Encyclopedia of Candlestick
Charts, will be available in March 2008. Before earning enough from his
investments to retire at age 36, he was a hardware design engineer at Raytheon
and a senior software engineer for Tandy Corporation. His website, dedicated to
chart pattern research, is
Copyright 2008 by Thomas N. Bulkowski. All rights reserved.
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