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When the FDA approves a drug and
it’s announced to the public, price can breakout in any direction, but the
probabilities say that price will trend down
soon after. This pattern isn’t worth trading because it has such poor performance.
Discovered by Thomas Bulkowski in the summer of 2003. For more information see pages 880 to
892 of the book
Encyclopedia of Chart Patterns,
Second Edition and the following...
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Important Market Results for Upward Breakouts
Overall performance rank (1 is best): 6 out of 6
Break even failure rate: 34%
Average rise: 20%
Throwback rate: 61%
Percentage meeting price target: 81%
Identification Guidelines
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Characteristic |
Discussion |
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Announcement |
News outlets report that the
FDA has approved a drug. |
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Wide swing |
Look for announcements in which
price makes a large intraday price swing, preferably 2 or 3 times the average intraday price swing over the last month. |
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Yearly high |
For best performance after an upward
breakout, select announcements that occur within a third of the yearly high. |
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Upward breakout |
A breakout occurs when price
closes above the high posted on the announcement day. |
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Volume |
Select patterns with heavy announcement
day volume, above the 30-day average. |
Trading Tips
Although I don’t recommend
trading this event pattern, there is an inverted J-shaped pattern that shows
promise. The following (except the measure rule
which refers to all upward breakouts) pertains to that situation. A study of the
pattern reveals that price declines an average
of 29% in 86 days after an upward breakout.
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Trading Tactic |
Explanation |
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Measure rule |
Compute the height (intraday
high minus the low) on the announcement day and multiply it by the above
"percentage meeting price target." Add the result to
the intraday high to get a price target. |
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Inverted J-shape |
For upward breakouts, look for a
price pattern that is an inverted J-shape. Price moves up following a trend, rounds
over, and heads back down. The figure to the right shows what this pattern looks
like. |
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Price rise |
After the breakout, price rises
between 3 and 6 weeks before beginning to slide. Ignore patterns outside that time limit. |
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Trendline |
Price follows a trend moving
higher. A trendline drawn along the bottom of that price trend, when pierced by
moving lower, is the sell or sell short signal. The figure near the top
of this page shows an example.
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 Inverted J-Shape
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Example
The above figure shows an example of what happens sometimes when the FDA approves a drug. News reports indicated
that the company and its partner received approval to sell Abilify in the U.S. Price gapped up on the news and a nice
rise followed. However, within a few weeks, the stock was moving down again, bottoming in March.
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