Bulkowski’s Inverted and Descending Scallops

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Inverted and descending scallops are robust performers in both bull and bear markets (slightly better in a bear market). Once the downward trend ends - if you can tell when that occurs - then buy and ride the new uptrend. Discovered by Thomas Bulkowski in mid 2004, but others may have found them sooner. For more information see pages 670 to 683 of the book Encyclopedia of Chart Patterns, Second Edition and read the following...
Inverted and descending scallop chart pattern
Inverted and descending scallop chart pattern

Important Bull Market Results

Overall performance rank (1 is best): 6 out of 21
Break even failure rate: 10%
Average decline: 18%
Pullback rate: 58%
Percentage meeting price target: 38%

Identification Guidelines

Characteristic Discussion
Price trend Downward leading to the scallop or at bearish turning points.
Shape Looks line an inverted J.
Smooth top Look for a rounded top, not V-shaped.
Down move From the start of the pattern (point A in the above chart) to its high (B) averages 55% of the following down move from highest peak (B) to scallop end (C, the lowest valley).
Ends Both the scallop start and end should form at price turning points.
Proportion The height and width of the scallop should look proportional.
Confirmation The scallop confirms as valid when price closes below the lowest valley in the pattern without first closing above the scallop’s peak.

Trading Tips

Trading Tactic Explanation

Measure rule

Compute the height from highest peak (point B in the Measure Rule chart to the right) to lowest valley (C) then multiply it by the above “percentage meeting price target.” Subtract the result from the lowest valley in the pattern (C) to get a price target.
Short Short the stock when price closes below the lowest valley in the pattern (C in the Measure Rule figure to the right).
Cover If price retraces (rises) 67% of the decline from B to C in the Measure Rule figure to the right, then cover the short.

Volume trend

Scallops with a falling volume trend perform best.
Confirmation Wait for confirmation before placing a trade.
Height Tall scallops perform better than short ones.
Trend Scallops get narrower and shorter the lower they appear in a price trend.
Pullbacks Pullbacks hurt performance.
Inverted and descending scallops chart pattern measure rule
The Measure Rule

Example

Inverted and descending scallop chart pattern example

The above figure shows an example of an inverted and descending scallop chart pattern. Point A begins the inverted scallop pattern and price peaks at B and then trends down to C, the end of the scallop. This one forms a handle, D, and that is quite common. Price resumes the downtrend after the handle completes.

Copyright © 2005-2007 by Thomas N. Bulkowski. All rights reserved. All computers wait at the same speed.