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The bump-and-run reversal top is a chart pattern that is a very good performer in both bull and
bear markets, judging by the low break even failure rate and high average decline after the breakout. The chart pattern
was discovered by Thomas Bulkowski in 1996 while researching price prediction techniques using trendlines. Originally
called the bump-and-run formation (BARF), the name was changed for obvious reasons. For more information see pages 132
to 148 of the book Encyclopedia of Chart Patterns, Second Edition and read the following...
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Important Bull Market Results
Overall performance rank (1 is best): 3 out of 21
Break even failure rate: 5%
Average decline: 19%
Pullback rate: 62%
Percentage meeting price target: 78%
Identification Guidelines
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Characteristic |
Discussion |
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Arithmetic scale |
Use the arithmetic chart,
not the semi logarithmic one because you will use it to measure vertical distance. |
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Rising trendline |
A trendline connecting the
price valleys rises upward at 30 to 45 degrees, but this varies with scaling. Do not use horizontal or near-horizontal trendlines
and avoid patterns with steep (over 60 degrees) trendlines. |
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Lead-in phase |
The lead-in is the section at the start of the pattern and
it precedes the bump phase. Price follows a rising trendline. The figure to the
lower right shows an example. |
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Lead-in height |
The tallest distance in the first quarter of the chart
pattern, measured vertically, is the lead-in height. Must be at least $1, but
preferably $2 or more. The chart on the right shows the measure between the two
blue dots, vertically, from trendline to price low. |
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Lead-in duration |
At least a month. |
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Bump phase |
Price rises in the bump phase following a steeper
trendline (45 to 60 degrees) on high volume usually after a favorable event
(earnings report, rating upgrades). Price rounds over and eventually returns to the
lower, 30-degree trendline setup in the lead-in phase. The chart on the right
shows an example. |
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Bump height |
Measured from the peak to the 30-degree trendline, it must
be at least twice the lead-in height. The chart on the right shows an example
between the two blue dots. |
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Downhill run |
After price returns to the 30-degree trendline, price may
bump up and form additional bumps or slide along the trendline before plunging
lower in a downhill run. The figure to the right shows one bump up followed by
the downhill run. |
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Volume |
High at the start of the pattern,
at the bump start, and at the downward breakout (where price pierces the 30-degree trendline). |
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Confirmation |
The pattern confirms as a
valid one when price closes below the 30-degree trendline. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
Compute the lead-in height then multiply it by the above
"percentage meeting price target." Subtract the result from the breakout price
(B) to
get a target. |
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Breakout |
Sell an existing holding or sell short when price closes
below the 30-degree trendline AB at
B. |
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Confirmation |
Wait for confirmation before placing a trade. |
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Warning line |
Draw a line parallel to the 30-degree trendline and lead-in
height above it (the lowest line parallel to AB). The
line warns that the stock is making a move and is entering the sell zone, an area
between the warning and sell lines. |
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Sell line |
Draw additional trendlines parallel to the warning line,
each lead-in height above it (E, shows as the green
arrows). Consider selling when price touches the sell line,
especially if the bump is narrow not rounded.
Delay selling if price continues moving up. When the stock rounds over and touches
a lower sell line (C), then close out your position.
The figure to the right shows the sell lines and price piercing a lower sell line,
suggesting it is time to take profit. |
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Reversals |
Patterns that act as reversals tend to perform better than
do those acting as continuations of the prevailing price trend. |
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Pullbacks |
Pullbacks hurt performance. The link to the left defines
a pullback, and this link shows performance. |
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Dual bumps |
28% show additional bumps after the first one. The second
bump would begin at B, rise up, round over and crash
through the 30-degree trendline before staging a downward breakout.
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Example
The above figure shows an example of a bump and run reversal top chart pattern, highlighted by the blue trendline.
Price begins the bump and run reversal at A and moves up in a confined trading range
until the bump phase begins at B. Price zooms upward and then moves in a wide trading
range, forming a descending triangle chart pattern (red lines). Price tumbles downward
out of the descending triangle and pierces the 30-degree trendline at C, staging a
breakout.
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