in bear markets than in bull markets. Volume trends downward from the first peak to the second, but plays no role in performance. Volume devotees may find that odd.
The performance rank for big Ms is good in bull markets but slips in bearish ones as the above statistics show. Let's look at some examples to see if we should include them in our trading toolbox.
Tour
Figure 6.1 shows a good example of a big M chart pattern. Price begins climbing to the first peak in the pattern from the launch price at A. Think of point A as the launch pad with the hope that price will return to the pad after the pattern completes.
In perfectly shaped big Ms, the price trend to the first peak is a straight line affair, often quite fast and steep, like you see here on the way to peak B.
The big M is a twin peak pattern, BC. It's similar in shape to a double top except for the tall sides, as I mentioned. Between the peaks is a recession, D, a valley where price bottoms. The stock recovers and forms a second peak, C.
After the second peak, price drops and breaks out when price closes below the valley between the two peaks. That happens at E in this example. The stock continues lower but then gets sucked back up to G. It's a pullback, which often returns the stock back to, or near to, the breakout price in 12 days on average.
A pullback is not part of the big M. Rather it's just something that occurs about two‐thirds of the time. Traders need to be aware of it so that they don't close out a position prematurely.
Figure 6.1 This big M sees price rise up to peak B and drop from peak C, bottoming at F just below the launch price, A.
In well‐behaved big Ms, price drops after the second peak in a straight‐line run down to the launch price, mirroring the rise to the first peak. That behavior represents the ideal situation, so don't depend on that happening in real life. In this example, the stock drops farther than the launch price, bottoming at F. Many times, however, price will bottom just above the launch price.
Identification Guidelines
Table 6.1 shows the identification guidelines for the big M.
Figure 6.2 provides another example of a big M at BD. Price begins the rise at A, the launch price (which is the second bottom of a nicely shaped Adam & Adam double bottom). Along the way, price gaps (an exhaustion gap because price consolidates after the gap) just past midway to the first peak and forms a pennant before resuming the climb to B.
Price meanders up and down as it searches for a bottom at C. The valley between BD looks like a mutant head‐and‐shoulders bottom (the left shoulder is LS, the right shoulder is RS, with head C between them. It's not an ideal head‐and‐shoulders because the two shoulders don't bottom at the same price).
At peak D, price gaps lower (breakaway gap) as if it can wait to reach grandma's house at E. The stock bottoms at E, which is just above the launch price (A). Notice that in this example, the rise from A to B is similar to the drop from D to E. That behavior rarely happens, so consider this a textbook example.
Appearance. Look for two peaks that top out near the same price. The two peaks likely won't share the exact same price, but they should be close. Use your best judgment and be flexible. If the right peak is higher than the left, performance improves but only by a percentage point. Oddly, performance is best if both peaks share the same price.
Table 6.1 Identification Guidelines
| Characteristic | Discussion |
|---|---|
| Appearance | Two peaks near the same price form a pattern that resembles an M. The price trend approaching the first peak should move upward at a good clip, with few or no pauses along the way. Be flexible, though. |
| Price trend | Price rises into the first top, often a multiple of the big M's height. See text for guidance. |
| Volume | Trends downward from peak to peak. |
| Breakout direction, confirmation | Downward. A breakout occurs when price closes below the valley between the two peaks. It confirms the pattern as a valid big M. |
| Duration | No minimum is set, but the median time between the two peaks is about a month. |
Figure 6.2 This big M (BD) struggles to find a bottom between the two peaks (where a head‐and‐shoulders bottom appears).
Between the two peaks, price forms a valley. I didn't set a limit on how far down the valley price slides, but the median height is about 12% in bull markets.
After the second peak, price drops, but often won't fall as steeply as it climbed on the rise to the first peak. In perfect patterns, the slope of the rise to the first peak will mirror the drop after the second peak, as I mentioned. In real life, it takes twice as long to drop from the second peak to the ultimate low as it did to climb from the launch price to the first peak.
Price trend. The price trend leading to the first peak should be unusually tall, often a straight‐line run up at a steep slope. As a good gauge, I looked at the height from the higher of the two peaks (D) to the valley between the two peaks (C). The upward trend leading to the first peak (A to B) should be a multiple of the peak to valley height (at least one times the height, but two times is better, CD).
Volume. Volume trends downward from the first to the second peak most often. Don't discard a big M pattern because it has a rising volume trend. Volume doesn't affect performance. We'll see that later in Table 6.6.
Breakout direction, confirmation. The pattern breaks out downward. A breakout happens when price closes below the low price of the valley between the two peaks. I show the breakout where price closes below line G.
A downward breakout confirms the big M as a valid chart pattern. If price does not break out downward, then you don't have a big M.
Duration. The length of the pattern, from peak to peak, varies from about a week to nearly a year (I often limit pattern width to 6 months, but the longest I cataloged was 254 days. I'm sure I can find wider ones), especially if I use a weekly scale (I prefer daily).
Focus on Failures
Figure 6.3 shows what a big M failure looks like. Price begins a long climb at A toward peak B. The drop to C and recovery to the second peak, D, is typical for a big M. Contrast dip C with the sloppy head‐and‐shoulders valley in Figure 6.2.
So far, the chart pattern looks perfect, a textbook example of a big M. Let's look at the volume trend (G). It slopes upward. Uh‐oh. But a rising volume trend in a big M doesn't have any impact on performance, so who cares?
At E, price breaks out downward when it closes below C, confirming the big M pattern as a valid chart pattern. However, the stock bottoms at E.
What happened?
A