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Ascending scallops are arguably the most common chart pattern, but they
are poor performers, especially in a bear market. Downward breakouts from the ascending scallop
chart pattern is especially treacherous as price tends to reverse quickly. Trade this pattern
carefully and be sure to have a stop in place. For more information see pages 624 to 638 of the
book Encyclopedia of Chart Patterns, Second
Edition and read the following...
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Score your chart pattern for
performance by clicking
here |
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 16 out of
23; 20 out of 21
Break even failure rate for up/down breakouts: 10%; 27%
Average rise/decline: 31%; 14%
Throwback/pullback rate: 58%; 56%
Percentage meeting price target for up/down breakouts: 58%; 25%
Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
Upward leading to the chart
pattern. |
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Shape |
The chart pattern looks like
the letter J. Find two peaks with a rounded valley in between and a higher right peak. |
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Volume shape |
Ascending scallops often show
U-shaped volume, which the link to the left shows. |
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Narrowing |
Scallops tend to be wider
near the start of a price trend than near the end. |
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Breakout, confirmation |
A close above the highest
high signals an upward breakout. Downward breakouts are a close below the pattern’s low. A breakout confirms
the scallop as a valid chart pattern. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
Compute the height from the highest peak
(A) to the lowest
valley in the pattern (B) and then multiply it by the
above “percentage meeting price target.” Add the difference to the
highest peak (A) to get a price target for upward
breakouts (C) or subtract it from the lowest valley
(B) for downward breakouts to get a target price. The
link to the left provides more information on the measure rule.
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Handle |
When price peaks on the right of
the pattern, it often retraces, forming a handle or another scallop. When price
bottoms, buy. The figure on the lower right shows an example. |
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Stop |
Place a stop below the lowest valley
(B in the figure to the upper right) if it’s not
too far away. The associate link provides more information about stop placement.
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Tall patterns |
Tall patterns perform better than
short ones. The associated link on the left gives more information.
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Volume trend |
A rising volume trend suggests
better performance. The link gives an example. |
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Volume shape |
Scallops with upward breakouts do
better when volume is U-shaped. The link to the left provides performance
information. Downward breakouts perform best when volume is dome shaped. This
link provides an
example. |
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Breakout volume |
Ascending scallops with heavy
breakout volume outperform. The link to the left provides more information while
this link provides
performance information. |
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Yearly low |
Breakouts from scallops within a
third of the yearly low do best. See the link to the left for more information.
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Throwback |
Throwbacks hurt postbreakout
performance. The link on the left defines a throwback and
this link gives
performance information. |
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Series |
Ascending scallops in a rising price
trend tend to get shorter and narrower as the trend end approaches. |
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 The Measure Rule
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 Scallop Handle
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Example
The above figure shows an example of an ascending scallop chart pattern. Price bottoms at point
A and then rises to B where it rounds downward to
C.
To calculate a price target, subtract the price of valley A from peak
B. That finds the height. Multiply the height by 58% (upward breakouts, the percentage
meeting price target from Important Bull Market Results table near the top of this page) and add the result to the
price at B. Place a stop loss order a few pennies below C
if the ascending scallop forms a handle. If no handle appears, a stop below A may be
too far away, but consider it. Raise the stop as price rises.
For downward breakouts, subtract the B-A height from A to get a lower target. Ignore targets below zero.
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