Bulkowski’s Broadening Tops

 
Like the broadening bottom, the broadening top is a poor performer, especially in a bull market. The break even failure rate is high and the average rise is meager. Partial rises and declines help predict the breakout direction and allow a trader to enter the stock sooner but also increases the risk of failure. For more information see pages 63 to 80 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

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Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 19 out of 23; 18 out of 21
Break even failure rate for up/down breakouts: 15%; 18%
Average rise/decline: 29%; 15%
Throwback/pullback rate: 54%; 48%
Percentage meeting price target for up/down breakouts: 62%; 37%

Identification Guidelines

Characteristic Discussion
Price trend Upward leading to the pattern.
Shape Higher peaks and lower valleys – a megaphone shape.
Trendlines The top trendline slopes upward, the bottom one slopes downward.
Touches At least two peaks and two valleys should touch their respective trendlines.
Volume shape Upward, often U-shaped. The link on the left shows an example.
Breakout Can occur in any direction (upward 50%, downward 50%) and it happens when price pierces a trendline or moves beyond the end of the pattern.

Trading Tips

Trading Tactic Explanation
Measure rule Compute the difference between the highest peak (A) and lowest valley (B) in the pattern to get the height. Multiply the height by the "percentage meeting price target" (see above) and add it to the highest peak (A, upward breakout) or subtract it from the lowest valley (B, downward breakout) to get a price target, D or E, respectively.
Intraformation trade Buy when price rebounds off the lower trendline (C), and short at the top (A) when price heads down.
Buy at 3rd touch When price touches the bottom trendline for the third time (C) and begins rising, buy.
Short at the top When price touches the top trendline and begins falling (A), sell or sell short.
Partial rise A partial rise works 61% of the time.
Partial decline A partial decline works 72% of the time
Price trend The best performing patterns are those with an intermediate-term (three to six months) rise leading to the pattern, regardless of the breakout direction.
Yearly low Those with breakouts near the yearly low perform best, regardless of the breakout direction. The link to the left discusses performance, and the following link provides additional information.
Volume trend Downward for the best performance, regardless of the breakout direction.
Breakout The breakout direction is upward 50% of the time.
Throwbacks and pullbacks Throwbacks hurt postbreakout performance when they appear, but pullbacks show no influence.
Broadening top measure rule
The Measure Rule

Example

Broadening top chart pattern example

The above figure shows an example of a broadening top chart pattern. A quick rise starts at A and leads to the broadening top chart pattern. Price oscillates up and down in broadening turns before dropping out of the bottom of the chart pattern, and staging a downward breakout. A pullback ensues, allowing price to recover and traders to exit before the decline resumes. Price attempts to return to the launch point A in late September, but does not make it.