Table Of ContentBROADENING PATTERNS:
Clues to breakout direction
A partial rise or decline can predict the direction of a breakout.
Learn to use these signals to increase profits when trading broadening patterns.
BY THOMAS N. BULKOWSKI
rying to determine when a difficult. However, partial rises (PRs) or too, allowing you to increase your prof-
breakout will occur in partial declines (PDs) con improve the its and reduce your losses. However,
broadening chart patterns, odds of making a correct decision. because a PR or PD often slows overall
which are expanding rather These signals predict immediate momentum, the size of the eventual
than contracting price formations, can be breakouts and indicate their direction. breakout is not as large as when a PR or
PD does not appear.
Broadening tops and
bottoms
Figure 1 (left) shows two
broadening bottom patterns.
These are different from
broadening tops because
price enters the pattern from
the top. In both patterns,
price touches each trendline
at least two times and
swings in a progressively
wider range. That is, the
minor highs get higher and
the minor lows get lower.
The July pattern shows a
PR, which occurs after the
pattern is established - that
is, there were at least two
touches of each trendline
before the PR. Price makes a
partial rise when it leaves the
bottom trendline and works
its way higher but fails to
touch or come too close to
the top trendline before turn-
ing away.
How close is "close"? Use
the figures in this article and
your common sense as
www.activetradermag.com • April 2004 • ACTIVE TRADER
guides. For example, the July broaden-
ing bottom has three top trendline
"touches," not two or four: The second
minor high (point 2) comes close enough
to call it a touch, but the third (point 3)
does not.
Analysis of 77 broadening bottoms on
500 slocks from mid-1991 to mid-1996, a
bull market, showed that a PR correctly
predicted a downward breakout 67 per-
cent of the time. The accuracy rale of
PDs predicting upside
breakouts was even better -
80 percent (see Table 1, lop
right, for more statistics).
Notice how the July pat-
tern is midway between the
price at the start of the
downtrend (around 32) and
its low (around 14). The mid-
dle of the pattern is around
23, the center of the 32-14
range. Although broadening
patterns sometimes act as
"half-suff patterns" that
form in the middle of moves,
broadening bottoms usually
function as reversals in a
downtrend, not as continua-
tion patterns within those
trends, as they do in Figure
1.
Figure 2 (right) includes
two broadening tops with
PDs. In a partial decline,
price leaves the top trendline
and descends but does not
come close to or touch the
bottom trendline. An
upward breakout usually
follows immediately. Again,
the broadening top pattern
must touch each trendline at
least two times before a PD percent of the time. When a PD oc- For PRs, the post-breakout decline
signal can occur. curred, the post-breakout up move was measured 15 percent; without a PR, the
Table 1 shows PDs in broadening lops 32 percent; without a PD, the rise meas- declines averaged 17 percent, indicating
correctly predicted an upward breakout ured 36 percent. Thus, the PD affected a partial rise steals energy from the
65 percent of the time, while partial rises momentum by reducing the eventual resulting down move.
were 86-percent accurate in predicting rally. PDs not resulting in breakouts False breakout signals for PRs (i.e.,
downside breakouts. occurred just nine percent of the time, when a partial rise occurred inside a
In a larger combined study of broad- which means false signals are compara- broadening top pattern after price
ening tops and bottoms, PDs worked 77 tively rare. continued on p. 38
ACTIVE TRAOER • April 2004 . www.activetradermag.com
touched each trendline twice
without triggering a break-
out) occurred just 11 percent
of the time in the 350 pat-
terns examined.
A broadening top usually
acts as a continuation pat-
tern within the prevailing
price trend, as shown in
Figure 2.
Right-angled broaden-
ing formations
Figure 3 (top left) shows a
"right-angled," ascending
broadening formation. The
top tnendline slopes upward
(ascends) and the bottom
trendline is horizontal or
nearly so. Like other broad-
ening patterns, the breakout
can occur in any direction,
but this pattern usually
reverses the trend- The fig-
ure shows this, as prices rise
into the pattern and exit out
the bottom.
Alter two touches ot each
trendline occur, look for a
partial rise or decline. The
late-May decline in Figure 3
does not show a partial
decline. Why? Because the
pattern at that point did not
have at least two minor
touches of each trend line.
Price touches at point 1 but it
is not a minor high or low, so
it does not count as a touch.
Point 2 is valid, as is point 3.
Only after price touches
point 3 can you draw the
horizontal trendline. By that
time, the three touches on
the top connect an up-slop-
ing trendline. The partial
rise that follows correctly
predicts a downward break-
out.
Figure 4 (bottom left)
shows a descending right-
angled broadening pattern.
The top trcndline is horizon-
tal and the bottom one
slopes down. Price touches
the bottom trendline,
bounces up but does not
www.activetradermag.com • April 2004 • ACTIVE TRADER
come close to or touch the
top trendline before retrac-
ing its gains. This PR predict-
ed a downward breakout. As
is the case with this example,
the descending, right-angled
broadening pattern usually
acts as a price reversal. In the
descending pattern, partial
uses worked just 58 percent
of the time and partial
declines worked 78 percent
of the time in descending,
right-angled broadening pat
terns.
Broadening wedges
Figure 5 (top right) shows
a descending broadening
wedge, which consists of
two down-sloping trendlines
(think of a downward-tilting
megaphone). The rules for
wedges are the same as other
broadening patterns: There
must be at least two minor
high touches of the top
trendline and at least two
minor low touches of the
bottom trendline. Only then
is the pattern valid and only
then should you look for a
partial rise or decline.
The pattern usually acts as
a continuation, rather than a
reversal, of the prevailing
price trend. However, the
two wedges shown in Figure
5 are reversal patterns. In the
August pattern, prices
climbed into the pattern and
broke out to the upside, but
the overall trend (except for
a few days after the break-
out) was downward after the
pattern. Prices in the October
wedge were trending down-
ward into the pattern and
exited out its top. The trend
after the pattern ends is pre-
dominantly upward.
In the August pattern
example, the slight dip in
early September was not a
partial decline. Price in a PD
must start from the top
continued on p. 40
ACTIVE TRADER • April 2004 • www.activetradermag.com
trendline, bow downward (without touching the top trendline. Instead, price Figure 6 (p. 39) shows an ascending
coming close to or touching the bottom drops down again and finally shoots exit broadening wedge. Both trendlines
trendline) and rejoin the top trendline. In the top. slope upward and minor highs and
this case, price leaves the bottom trend- A partial decline correctly predicts an minor lows touch each trendline at least
line, not the top one. upward breakout 76 percent of the time. twice. The January partial decline failed
In the October pattern, the first partial Not enough samples were found for par- because price did not break out to the
decline is a failure because price does tial rises in descending broadening upside - it touched the top trendline,
not breakout upward immediately after wedges. then reversed.
The partial rise does better when it
leaves the bottom trendline, bounces up
and then plunges through the bottom
trendline. A PR correctly predicts a
downward breakout 84 percent of the
time.
