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After the breakout from a chart pattern, price drops then curls upward and returns
to the launch price. This curling price behavior is called a pullback. This page provides details on the
behavior of this unique chart pattern.
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 Pullback example
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Identification Guidelines
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Characteristic |
Discussion |
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Shape |
U or V (any shape, really). |
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Time |
By convention, a pullback
occurs within 30 days after the breakout. |
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White space |
The stock must not slide along the breakout price but must
drop down, curl upward and return to, or come close to, the breakout price or chart
pattern trendline. See the above figure. |
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Volume |
High volume breakouts have
a tendency to pullback more often than low volume ones. |
Trading Tips
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Trading Tactic |
Explanation |
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Expect one |
Expect a pullback will occur.
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Underlying support |
This is the chief cause of
a pullback. Price bumps against underlying support and then retraces the decline. Be sure to look for prior peaks and valleys,
horizontal consolidation regions (HCRs), and other signs of underlying support before trading. |
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Pullback rate |
56% of 10,878 chart patterns
had pullbacks. |
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Time |
Price drops for 3 days after the
breakout, on average, before beginning the return journey. |
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Loop time |
It takes an average of 10 days,
total, for price to complete the return trip back to the breakout, as measured from the breakout day to the day price returns. |
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Height |
The average drop from the breakout
price to the bottom of the pullback is 9%, but a frequency distribution shows that most fall in the range of 4% to 10% about
evenly. |
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Volume |
A high volume (above the 30-day
average) breakout pulls back 66% of the time, on average. |
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Price rise |
After the stock returns to the breakout
price, 13% continue rising above the chart pattern. That means 87% of the time
price resumes the decline. |
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Measure Rule
The measure rule for pullbacks is similar to the measured move down chart pattern. Using
the figure to the left as a reference, find where the downward price trend begins (the swing high
at point A) and subtract the price where the trend bottoms at
B (the swing low). Subtract the
difference from the pullback high at C to get a price target.
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Price Trend
If price has more than three consecutively lower closes ending the day before the breakout,
then expect price to have a lower probability of pulling back. See the study,
Price Trends Leading to the Breakout.
The picture to the left shows an example of price making four consecutively lower closes
and not pulling back.
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Power Move
During a pullback attempt, if price remains below the breakout price, then expect a more
powerful move than if price rises above the breakout. I measured this in 19 chart pattern
types from July 1991 to March 2005 and found 10,348 chart patterns. Of that group, 2,738 had
pullbacks. When price remained equal to or below the breakout price, the drop averaged 25%
(323 samples qualified). When price climbed above the breakout, the resulting drop averaged
just 20% (2,415 samples). The numbers measure the drop from the breakout to the ultimate low,
which is the lowest low before price rises by at least 20%.
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Example
The above figure shows an example of a pullback from a downward breakout of a descending triangle chart pattern.
After price returns to the breakout price, it drops but the decline bottoms in a few days. Then price recovers and busts
the triangle when it closes above the top trendline, signaling a powerful move upward.
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