Downward Breakouts
| Bull Market | Bear Market | |
| Reversal or continuation | Short‐term bearish reversal | Short‐term bearish reversal |
| Performance rank | 28 out of 36 | 14 out of 19 |
| Breakeven failure rate | 27% | 9% |
| Average drop | 13% | 22% |
| Volume trend | Upward | Upward |
| Pullbacks | 67% | 67% |
| Percentage meeting price target | 42% | 46% |
Broadening tops, not surprisingly, look a lot like broadening bottoms. What separates a top from a bottom is the price trend leading to the chart pattern. For tops, the inbound price trend is upward; for broadening bottoms, it is downward. This is an arbitrary distinction I made just to see if the two chart patterns act differently. In answer to the question you have probably posed right now: Yes, the two formations have slightly different performance (but both are yucky).
A brief review of the Results Snapshot shows the performance rank is midrange. The rank is based on how far price moves after the breakout compared to other chart pattern types.
The breakeven failure rate for downward breakouts in bear markets is terrific, just 9%, but that ranks the pattern at 11 out of 19 (not shown). As small as the failure rate seems compared to the others shown in the table, it's still a mid‐list performer.
The average rise varies from 25% in bear markets, where the general market is trying to drown price, and 42% in bull markets, where the market trend tugs on the stock like a helium balloon. The average decline is 13% in bull markets, which compares to a 22% drop in bear markets. This time, bear markets are pulling price downward, hence the larger average drop than in bull markets.
Tour
Broadening patterns come in a variety of styles and names. There are the broadening tops and bottoms, right‐angled ascending and descending, expanding triangle, orthodox broadening top, and five‐point reversal. The last three—expanding triangle, orthodox broadening top, and five‐point reversal—are synonyms for the broadening top, with the last two being based on five turning points.
Figure 11.1 A potential triple top changed into a broadening formation. The one‐day reversal appeared as the third peak after an unsustainably quick price rise. The broadening top formation marked a struggle between eager buyers and reluctant sellers at the lows and the quick‐to‐take‐profit momentum players at the peaks.
For a tour of the chart pattern, look at Figure 11.1. The stock began an uphill run in December 1994 and continued climbing to reach a high in mid‐September at 53.75. Holders of the stock, enjoying the long run, decided to sell their shares and retire in Florida. The stock headed lower. On 25 September 1995, volume spiked upward and halted the decline. Investors, seeing a 40% retrace of their gains from the June peak, apparently thought the decline overdone and purchased the stock, sending price back up.
Price peaked at a higher level, 54.50, on 19 October. Astute traders, who suspected a double top was forming, promptly sold their holdings to maximize their gains, sending price tumbling. Price confirmed the double top when it fell below the confirmation price (below the lowest low between the two peaks), at 48.75.
Volume picked up, and the struggle between supply and demand reasserted itself. The decline stalled as traders willing to buy the stock overwhelmed reluctant sellers. The stock turned around and headed higher. By this time, chart followers could draw the two trendlines—one across the twin peaks and another below the two valleys—giving birth to the broadening top pattern. Traders jumped on the bandwagon at this point and purchased the stock. They wanted to play the anticipated rise as the formation broadened out. The stock cooperated and moved higher, reaching the top trendline once again at a new high of 55.50.
The steepness of the ascent in the latter stages was unsustainable. The peak looked like a one‐day reversal, with a close near the low of the day and a tall daily price swing. However, volume was unconvincing. It was higher that day than during the prior week, but it certainly was not of the caliber of the late November spike.
In any case, the stock tumbled and soon reached a new low of 43.50, stopping right at the bottom trendline. Once the stock began moving higher, the momentum players jumped on board and volume increased along with price. Buying enthusiasm and rising momentum pushed the stock higher, climbing through the top trendline. An upward breakout occurred.
Throughout the various peaks and troughs as this chart pattern unfolded, there was a struggle between buyers and sellers. Near the lows, the buyers believed the stock was oversold, and they eagerly bought it. At the top, they and others sold their shares and pocketed handsome profits. This selling pressure, of course, sent the stock back down.
Some investors—seeing the stock decline below their purchase price and still believing that the stock had value—bought more. That behavior also helped turn the stock around at the lows and probably explained their heightened nervousness at the top. They wanted to keep their gains this time instead of watching them evaporate should the stock decline again.
The broadening top shown in the figure also makes evident that identifying the ultimate breakout is difficult. It appears that each new high or new low may be the final push to freedom. Only when price moves in the opposite direction is it clear that price will not break out. We explore ways to profit from that behavior in the Trading Tactics section.
Identification Guidelines
Table 11.1 shows the identification guidelines for the broadening top.
Appearance. The pattern looks like a megaphone with price peaks and valleys bounded by two diverging trendlines. The top trendline slopes upward, and the bottom one slopes downward.
Price trend. The price trend leading to the start of the pattern is what differentiates a broadening top from a broadening bottom. For broadening tops, the price trend should be upward, leading to the chart pattern, not downward as in the broadening bottom. This is just an arbitrary designation I have chosen to distinguish tops from bottoms (in all chart pattern types).
Trendlines. Trendlines drawn across the peaks and valleys resemble a