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Pipe Bottoms


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Pipe Bottoms

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  #1 (permalink)
 DonStar 
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Hi All: First, I want to wish everyone a Happy and prosperous 2012. I have been spending most of my time on futures.io (formerly BMT) reading and observing. This journal will be my 1st attempt at getting involved. I appreciate that such a great forum exists and have nothing but hope for the year ahead of us.

I have been looking at Pipe Bottom formations and thought I would spend some time this topic. Hopefully others will have experience and/or thoughts about it.

Pipe Bottoms were popularized by Thomas Bulkowski and it is through his book "Encyclopedia of Chart Patterns" and his web site thepatternsite.com that I have gained what little knowledge I have about them.

Two adjacent downward price spikes compose the pipe bottom, and it looks like two parallel lines on the chart. A major drawback of this pattern is that Bulkowski suggests that you use weekly charts to identify and trade this pattern. Although pipes appear on daily charts, they do not perform as well as pipes on weekly charts (he says).

This week pipe bottom formations are forming on 5 stocks: ANN, GILD, LTD, LSI and PDCO.

As I move forward with this journal, I hope to follow these setups initially and others that follow. I am looking forward to learning and understanding more as I go along.

I have already noted something I think is very interesting on GILD. Although the recommendation is to use weekly charts, as I was looking at the daily chart on GILD there is a very nice daily pipe bottom (PB) that preceded the weekly PB. I don't know what this means, if anything, but I think it is worth a look.

I will get some charts posted as well as follow-up with rules and guidelines for this set up.

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 DonStar 
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Pipe Bottom Characteristics/Guidelines

Weekly Chart: The first guideline suggests that you use weekly charts. Although pipes appear on daily charts, they do not perform as well as pipes on weekly charts.

Two downward adjacent spikes: Two adjacent downward price spikes compose the pipe bottom, and it looks like two parallel lines on the chart.

Large spikes: The pipe spikes should appear as a large price drop and wide price range for 2 weeks in a row. The week before and after the pipe should have low prices near the top of the pipe. This characteristic makes the pipe stand out on the price chart as an easily recognizable formation. The spike decline should be unusual. The length should be well above the average downward spike length over the past year. It must appear as a large decline on the price chart, not just another 2-week blip in a sea of long downward price spikes.

Large overlap: The pipe has a large price overlap. As a selection guideline, you do not want to see a large left side and a short right side.

High volume: Volume for each pipe spike is usually above average but need not be. Pipes with above average left volume and below average right volume perform better than all other combinations. However, do not exclude a pipe simply because it does not obey the volume characteristics.

Obvious pipe: The pipe must be unusual enough to jump out of the price chart. Typically, pipes form at the end of a decline and mark a turning point. Less frequently, pipes act as a consolidation of the upward trend. They spike downward for 2 weeks, then prices continue rising.

Wait for confirmation: The twin bottom pattern confirms as a pipe bottom only when price closes above the highest high in the pattern. Do not invest in a pipe without confirmation.

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 DonStar 
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On this weekly chart of ANN the Pipe Bottom bars don't look like they have long enough spikes. The stock is not in an established downtrend. And it does not look like price will confirm by closing above the highest high of the two pipes.

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 vvhg 
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Wouldn't the low about 20 bars back fit the description you gave quite well?

Vvhg

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 DonStar 
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Yes vvhg. I agree with you. There are several previous potential setups on these charts when you look back at them.

I will use current setups as my starting point and move forward from here. Good observation though...

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 DonStar 
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Out of the 5 patterns watched this week, 4 of them failed to confirm by closing higher than the highest high of the two spikes that make up the pipe bottom formation.

GILD did confirm by closing higher. So the next move is to buy GILD on the next trading day (usually Monday).

I want to look at strategies for entering the trade. Maybe use a smaller timeframe to select best entry.

The stop should be placed slightly below the low of the formation (pipe bottoms tend to act as support).

I also want to look at developing a scanning tool to mine potential setups.

More as this develops...

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 DonStar 
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Okay, here is an update on the pipebottoms.

Of the 5 pipebottoms identified, only one confirmed it's pattern last Friday (GILD).

I put in a buy at market order to purchase 10 May Call options. This order filled at $2.89 for a purchase price of $2,890.00.

Today GILD closed at $4.20 for a one-week gain of 45.33%

See attached chart.

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 DonStar 
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Compute the height from the taller of the two spikes to the lower of the two (the AB distance).
[This number is 2.35]


Then multiply by the “percentage meeting price target (83%).”
[1.95]


Add the difference to the higher of the two (A) to get a price target, C.
[41.28]


Using this calculation we, we have met our target price. Today’s close was 42.78

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 kbit 
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I know I'm veering off course a little by not showing a weekly.
This is a ES tick chart with what I would call a pipe bottom....do you agree, additionally do you have any stats on success rates of lower time frames ?
just curious.
Kbit

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