Encyclopedia of Chart Patterns. Thomas N. Bulkowski

      If price closes outside a trendline boundary, then the penetration point becomes the breakout price. If price moves up (for example) and follows along the top trendline without piercing it, then I backtrack to the prior minor high and draw a horizontal line forward in time until price closes above the horizontal line. When that happens, that is the breakout point (providing the pattern obeys the other identification guidelines first). Use the same logic for a downward breakout.

      Let me give you an example. Consider the broadening bottom shown in Figure 8.3. Where's the breakout from the broadening bottom?

      Figure 8.3 Where's the breakout?

If you wait for price to close above the top trendline, then you'd have to wait until C. Imagine if the top trendline were steeper. You might never see a breakout.

      If the pattern meets all of the identification guidelines (especially trendline touches) and price begins sliding upward (along the top trendline or downward along the bottom one), like you see from B to D, then go back to the prior minor high (upward breakout) or prior minor low (downward breakout) and use that price as the breakout price. In this case, point B is the prior minor high in the chart pattern and the breakout is point D. If you worry about buying into the broadening bottom too late, then skip the trade. Chart patterns are not like attending a party 15 minutes late. Promptness pays.

Focus on Failures

      Figure 8.4 shows a typical broadening bottom failure. Price trended down from the March high. On 19 March (E), the company announced the pricing of a secondary public offering of nearly 8 million shares of common stock. The stock price took a hit and shares tumbled that day and the next, just before the start of the broadening bottom.

      The broadening bottom formed innocently enough with price swinging from low to high (A). Price touched the top trendline three times and the bottom trendline three times, as one would expect in a well‐behaved broadening bottom (meaning at least 5 touches).

      Figure 8.4 This broadening bottom breaks out downward, reverses, and busts the downward breakout.

At B, the stock broke out downward from the broadening pattern when price closed below the lower trendline. Because price trended downward going into the pattern, a trader might expect a downward breakout, too (so the pattern acted as a continuation of the downward price trend). Indeed, they might expect price to drop back to just above the December 2018 low (F).

      However, the stock surprised traders when it stalled at C. It was even more of a shock when the stock began to stair‐step higher and closed above the top of the pattern at D. At D, the stock busted the downward breakout. After that, the stock was an airline taking off and flying into the clouds.

      The behavior of the broadening pattern shown in the figure represents what I call a 5% failure. Price breaks out lower but fails to continue moving in the breakout direction by more than 5% before heading back up. The reverse is also true for upward 5% failures: Price climbs after an upward breakout by no more than 5% before tumbling.

Statistics

      Table 8.2 shows general statistics for the broadening bottom chart pattern.

      Number found. I dug up 1,238 patterns in 667 stocks starting from August 1991 to September 2019 but removed the bear market ones because they were too few when sorted by breakout direction. Not all stocks covered the entire range, and some no longer trade. Both up and down breakouts are for bull markets.

      Reversal (R), continuation (C) occurrence. By definition, a bottoming pattern has price entering the pattern from the top. A pattern acting as a reversal sends price out of the pattern upward (reversing the downtrend). A continuation pattern breaks out downward (continuing the downtrend).

      Average rise or decline. Price posts a 45% rise after an upward breakout, helped along by a bullish general market. Downward breakouts suffer when price tries to drop in a bullish market. That's like swimming against the current.

Table 8.2 General Statistics

Description	Up Breakout	Down Breakout
Number found	599	405
Reversal (R), continuation (C) occurrence	100% R	100% C
Average rise or decline	45%	–15%
Standard & Poor's 500 change	14%	–2%
Days to ultimate high or low	240	47
How many change trend?	52%	29%

Standard & Poor's 500 change. The performance of the index can't compare to the performance posted by the chart pattern. That's typical, but I'm not sure it's a fair comparison. We're comparing a perfect trade to the index, using the same dates as the broadening bottom trade. It does show that broadening bottoms can beat the indices, and it also shows that the general market helps performance.

      Days to ultimate high or low. This is a measure of how long price takes to reach the ultimate high or low (after the breakout). For upward breakouts, it'll take about 8 months of worry to reach the ultimate high. Downward breakouts take about 6 weeks to drop 15%.

      If you compare the ratio of 45% in 240 days to 15% in 80 days, we discover that price drops nearly twice as fast as it rises. That might be a hint for options traders. You might be able to reach your price target faster during a downtrend than an uptrend.

      How many change trend? Over half of broadening bottoms with upward breakouts see price rise more than 20% after the breakout (which is good). Downward breakouts suffer, with only 29% dropping more than 20%. The best patterns see price forming strong and lasting trends.

      Table 8.3 shows failure rates. How do you measure failure? It took a while before I was able to answer that. I measured the move from the breakout price to the ultimate high or low and sorted the results into bins. Then I counted how many entries I had in each bin. It's like sorting coins you found under the seat cushions into piles of dimes, nickels, and quarters, and then counting how many dimes you found, and how many nickels, and so on.

      If the breakeven cost of trading is 5%, then we see that 16% of the patterns with upward breakouts will fail to see price rise more than 5%. Downward breakouts are worse, with 26% of them failing to drop more than 5%.

      Notice how the failure rates climb. Almost half (46%) of downward breakouts see price drop no more than 10%. Ouch.

Table 8.3 Cumulative Failure Rates

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Maximum Price Rise or Decline (%)	Up Breakout	Down Breakout
5 (breakeven)	98 or 16%	106 or 26%
10