Bulkowski’s Inverted Roof

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The inverted roof chart pattern is one I discovered in early 2005. The name is based on its complement, the roof chart pattern. I found 200 inverted roofs in 500 stocks from July 1991 to July 1996 and in 465 stocks from January 2005 to January 2007.

Important Results

Identification Guidelines

Trading Tips

Example

Inverted roof chart pattern

Important Bull Market Results

Overall rank for up/down breakouts: 24 out of 25; 13 out of 21 (1 is best)

Break even failure rate for up/down breakouts: 19%; 10%

Average rise/decline: 19%; 17%

Throwback/pullback rate: 65%; 56%

Percentage meeting price target for up/down breakouts: 71%; 73%

Identification Guidelines

Characteristic	Discussion
Price trend	Can be any direction leading to the pattern.
Shape	Has a horizontal or near horizontal top with a V-shaped bottom, making the entire structure look like the bottom half of a diamond. See the above figure.
Uptrend	The best performing inverted roof chart patterns appear after a sharp rise like you sometimes see in diamond top chart patterns
Symmetrical	The two halves of the inverted roof chart pattern should appear symmetrical. Allow variations, but most look like a V with price touching the horizontal top often.
Head-and-shoulders bottom	Make sure the pattern isn’t a head-and-shoulders bottom or a complex head-and-shoulders bottom.
Confirmation	The pattern confirms as valid when price closes outside the chart pattern trendline boundary.

Trading Tips

Trading Tactic	Explanation
Measure rule	Compute the height (the difference between the inverted roof’s high, B, and the low, A) and then multiply it by the above “percentage meeting price target.” Add or subtract the result from the breakout price to get a target. The Measure Rule figure to the right shows the measure for an upward breakout.
Uptrends	A strong downtrend usually follows a sharp uptrend, returning price back to (or slightly above) the launch point. The Price Trend figure to the right shows an example.
Confirmation	Wait for confirmation before placing a trade because the breakout can be upward or downward.
Throwbacks and Pullbacks	Throwbacks and pullbacks hurt performance.
Height	Tall patterns outperform short ones. Measure the height from horizontal top (B in the Measure Rule figure to the upper right), to the lowest low in the chart pattern (A) and divide it by the breakout price. Height to breakout price values over 8.84% (upward breakouts) or over 9.33% (downward breakouts) are considered tall.

Inverted roof chart pattern measure rule

The Measure Rule

Price Trend

Example

Inverted roof chart pattern example

The above figure shows an example of an inverted roof chart pattern. Price begins the climb into the inverted roof at A and overshoots the top of the pattern (which happens about 15% of the time). The breakout from the inverted roof is downward and price returns to the launch price at B. A pullback ensues, sending price back to the breakout and it moves sideways from then on.