Reversal (R), continuation (C) occurrence. Upward breakouts act as continuation patterns most often, but downward breakouts act as reversals. Recall that a reversal has price leaving the chart pattern in a direction opposite the way it entered. Continuation patterns have price exit in the same direction as the prevailing price trend.
Reversal/continuation performance. Upward breakouts show better performance from reversal patterns, but downward breakouts favor continuations.
Average rise or decline. Shown in the table is the average rise or decline. Nothing spectacular here.
Standard & Poor's 500 change. I compared the date of the breakout to the ultimate high or low posted by the chart pattern and compared those to the index. The index shows it didn't perform nearly as well as the broadening pattern over the same holding period.
Days to ultimate high or low. Upward breakouts take an average of about 8 months to reach the ultimate high, but downward breakouts end faster, in about 2 months. The yardage traveled is different, though, because upward breakouts rise 43% and downward breakouts drop 15%. If you do the math, we find that the downward breakout should have reached bottom in 85 days, not 51. So, price dropped faster than it climbed.
How many change trend? I added this measure to help decide which chart patterns lead to outsized gains (a gain or loss of more than 20%). The results shown in the table are mid‐list numbers. The upward breakout number is good (more than half the patterns see decent gains), but downward breakouts fall well short of a 20% loss (just 27% drop that far).
Table 10.3 shows various failure rates for the two breakout directions. How do you make sense of the table? It is easier to understand by example. I found that 21% of the patterns with upward breakouts failed to see price rise more than 5%. Over half (51%) of the patterns failed to see price rise more than 25% after an upward breakout.
Table 10.3 Cumulative Failure Rates
| Maximum Price Rise or Decline (%) | Up Breakout | Down Breakout |
|---|---|---|
| 5 (breakeven) | 125 or 21% | 77 or 23% |
| 10 | 65 or 32% | 72 or 33% |
| 15 | 46 or 39% | 50 or 59% |
| 20 | 43 or 46% | 45 or 73% |
| 25 | 29 or 51% | 29 or 81% |
| 30 | 44 or 59% | 21 or 88% |
| 35 | 28 or 63% | 15 or 92% |
| 50 | 65 or 74% | 17 or 97% |
| 75 | 55 or 83% | 9 or 100% |
| Over 75 | 101 or 100% | 0 or 100% |
Table 10.4 Breakout and Post‐Breakout Statistics
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Breakout direction | 64% up | 36% down |
| Performance of breakouts occurring near the 12‐month low (L), middle (M), or high (H) | L 46%, M 49%, H 41% | L –19%, M –14%, H –12% |
| Throwbacks/pullbacks occurrence | 64% | 69% |
| Average time to throwback/pullback peaks | 5% in 6 days | –7% in 6 days |
| Average time to throwback/pullback ends | 12 days | 12 days |
| Average rise/decline for patterns with throwbacks/pullbacks | 43% | –15% |
| Average rise/decline for patterns without throwbacks/pullbacks | 42% | –15% |
| Percentage price resumes trend | 71% | 55% |
| Performance with breakout day gap | 35% | –18% |
| Performance without breakout day gap | 44% | –15% |
| Average gap size | $0.45 | $0.37 |
You read downward breakouts in a similar manner. Almost a quarter of the patterns (23%) saw price drop no more than 5%. Half (59%) didn't see price drop more than 15%.
Table 10.4 shows breakout‐related statistics.
Breakout direction. Price breaks out of the pattern upward almost twice as often as downward.
Yearly position, performance. I sorted the breakout price into one of three buckets, each a third of the yearly high–low range. Then I checked performance for patterns in those three buckets. The table shows that there's not a big performance difference for upward breakouts. Clearly, though, you'll want to avoid trading patterns within a third of the yearly high (price rises 41%).
Downward breakouts also show those near the yearly high