Bulkowski’s Stock Downgrades

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A stock rating downgrade by a broker is a bearish event. Even if the breakout is upward, price soon peaks and then drops. The breakout, however, is usually downward. Discovered by Thomas Bulkowski in the fall of 2003. For more information see pages 934 to 949 of the book Encyclopedia of Chart Patterns, Second Edition and read the following...

Important Results

Identification Guidelines

Trading Tips

Example

Downgrades for up and down breakouts shown

Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 3 out of 6; 2 out of 5

Break even failure rate for up/down breakouts: 25%; 26%

Average rise/decline: 27%; 14%

Throwback/pullback rate: 49%, 48%

Percentage meeting price target for up/down breakouts: 71%, 69%

Identification Guidelines

Characteristic	Discussion
Announcement	A broker downgrades the stock and makes the information public.
Wide swing	Look for announcements in which price makes a large intraday swing, 2 or 3 times the average daily intraday price swing over the last month.
Downward breakout	The breakout is usually downward, and it occurs when price closes below the low made on the announcement day.
Volume	Heavy on the announcement day.
Behavior	For upward breakouts, price rises, rounds over, and then declines. For downward breakouts, price drops but pulls back almost half the time.

Trading Tips

Stock downgrades are middle of the range performers. Upward breakouts see prices rise but only for a time. Downward breakouts have a tendency to bottom quickly, so they are not good short candidates either. Regardless of the breakout direction, 50% of the time price reverses in a week or two. Almost two-thirds reverse in less than 3 weeks.

Trading Tactic	Explanation
Measure rule	See the figure to the right. Using the announcement day, subtract the intraday low (B) from the high (A) and multiply it by the above “percentage meeting price target.” Add the result to the intraday high (A) for upward breakouts, or subtract it from the intraday low (B) for downward breakouts to get a target price.
Confirmation	Price confirms the pattern when it closes above the announcement day high, or closes below the announcement day low. Wait for price to confirm the pattern because the breakout can be in any direction.
Don’t buy	Don’t buy after a downgrade because price usually collapses.
Sell	Consider selling a long holding immediately or after a pullback completes.
Short a downward breakout	Price breaks out downward but has a tendency to recover in a week or two. If you are a swing trader, then short at the breakout and cover at the first sign of a turn. This works best in a bear market. For other traders, don’t trade this event pattern.
Short upward breakout	Try shorting the stock after an upward breakout when the stock begins tumbling. Watch for the rebound after a throwback completes as price might continue rising instead of moving on down.
Yearly low	The best performing downgrades occur near the yearly low.

The Measure Rule

Example

Broker rating downgrade event pattern example

The above figure shows an example of a broker rating downgrade of the stock. It takes price a week before it closes below the line at B. Then it bottoms the same day (A) before beginning an extended rise. Notice how the downgrade comes just before price makes a strong move up. This happens more than you would expect.