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Pattern Recognition

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In a December 4, 2006 interview with TraderInterviews.com, the great Tom Bulkowski separated patterns that the short-term trader might want to follow from those that might be useful to long-term traders. How would one find a stock fulfilling one of the patterns Bulkowski associates with successful plays or a pattern that a trader has identified as useful?

Two sites help traders identify stocks whose prices are displaying certain key patterns. For example, www.stockcharts.com offers stock scans that pinpoint stocks that have exhibited certain patterns. The trader who wants to identify stocks hitting new highs will find the number of Nasdaq, NYSE and Amex stocks having hit new highs as well as exhibiting many other technical, candlestick and point-and-figure patterns. The chart below displays just a few of the available patterns for which Stockcharts.com searches.

Partial Screen Capture from Stockcharts.com's Stock Scans:

Clicking on the underlined "12" in the "Nasdaq" column beside "Gaps Up" will produce a list of the 12 Nasdaq stocks that have produced such gaps. Columns for NYSE and AMEX stocks widened the table too much to meet formatting guidelines for this article, but are included on the Stockcharts site. Mutual funds are also tracked for some of the technical and point-and-figure patterns.

Stockcharts' "Chart School" even provides some discussion of certain of the patterns for the trader who finds an unfamiliar pattern listed. These Stockcharts.com scans are among the simplest to find and use.

Another site also offers discussion of certain patterns and does it in more depth. Patterns are marked on directly on charts. Information on the failure rate of each pattern to predict the next price direction or meet projected targets is included. Moreover, the discussion comes from Bulkowski himself.

That's because the site is Bulkowski's. It's new, and it's free. It's at www.thepatternsite.com/. For example, after the pattern recognition software from the site was downloaded, and then historical prices for Dell were pulled from http://finance.yahoo.com, "chart" was clicked. A screenshot noted several patterns identified in recent months. (Note: This article was roughed out several weeks ago, and so charts are not up to date.)

Screenshot of Pattern Identification for Dell:

One pattern identified at the top of the screen was the "Pipe Botm" or pipe bottom. Although the screenshot does not capture the button for "Tell," because of width restrictions for the screenshots I can include in my articles, this button allows a trader to click on a candle within such a pattern and be told the significant facts about such a pattern. Bulkowski identifies the pipe bottom as a highly reliable bullish formation, although he cautions that it shows up on a weekly chart and so can result in a delayed bullish entry. For reliability, he awards the formation a score of 2 out of 23, with 1 being the best possible score. Certainly, that particular pipe bottom was reliable, with DELL climbing significantly after it was formed.

Traders who have prefer certain formations as triggers for their plays can customize the patterns page to search for those patterns. Other customizations are offered, too. Traders might be particularly enamored of the "stop" button that allows traders to click on any price bar and be shown a computed one-month volatility stop for up or down breakouts. Another interesting form forecasts the next day's close, with Bulkowski using an exponential moving average of price changes to make that forecast.

Clearly this site offers more information than the Stockcharts version, and many more capabilities exist than have been discussed here, but that greater information comes at a price, too. Traders must download historical price information into a file for each stock they want to scan. Then they must specify the path for the file before the chart can be produced. I'm no guru on the computer, and I didn't experience too much difficulty with this aspect of the site, so I don't anticipate that others with basic to moderate computer skills would, either. However, the Stockcharts version was clearly easier, with Stockcharts providing all the chart data without any need to seek it, download it and delineate the path.

Also, when I accessed some of the special features, screens occasionally froze. Bulkowski offers a page that lists the various glitches that sometimes occur, and, if any such problem is not listed there, he asks users of this shareware to email him, providing a link for his email. He cautions, however, that this is a free site and that potential users should read all the provided information in the tour before they download the pattern recognition software.

If you're a trader who likes trade setups based on certain chart patterns, take a look at these two sites and see if they help identify those setups.
 

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