What is a bump and run chart pattern?
The bump and run reversal bottom pattern is a spoon or a frying pan formation that follows a downtrend in prices until it lets off a large decline or a dip in prices. It describes a short-term reversal that is followed by an upward breakout. The pattern is similar to the cup-with-handle formation, although the latter does not depend on a prior downtrend in price. In terms of performance, tall and wide patterns do better than short or narrow price trends. Statistics show that after successful identification of the breakout, gains increase between 31-38%, with a low break-even rate of failure at 2%.
This pattern was discovered by Thomas Bulkowski in 1996. He was studying trendlines and how they can generate price predictions when he came up with them. Originally, he named it the bump and run formation (BARF), but such a nickname wouldn’t fare well on Wall Street. Hence, the bump and run reversal pattern.
Tom Bulkowski’s bump and run reversal formation identification
For a pattern to qualify as a valid bump and run reversal, it has to satisfy the following conditions.
- The lead-in trendline should make an angle of 30 to 45 degrees with the horizontal. It should not be too steep nor too close to horizontal. The bump phase trendline’s angle with the horizontal should be twice the size of that of the lead-in trendline, approximately 45 to 60 degrees.
- The lead-in phase should be to the left of the bump phase.
- The widest distance between the highest top of the lead-in phase and its trendline is the lead-in height. The widest distance between the highest top of the bump phase and the lead-in trendline is the bump height. The bump height should be at least twice as long as the lead-in height.
- The lead-in phase should last for a minimum of one month.
- The volume should spike at the beginning of the bump and at the breakout point.
- The pattern is confirmed after the price crosses the lead-in trendline after the bump. If the price does not cross this trendline, then the pattern does not qualify as a bump and run reversal.
Chart 1: Bump and run reversal bottom pattern
Chart 1 shows a 5-year chart of the iShares Silver Trust (SLV) ETF from 2016 to 2021. The price downtrend has been spotted from mid-2016 to 2021. There is intermittent volatility from 2017 to 2019 as prices continue to decrease. The bump is in July 2019, when prices begin to pick. A closer look at the chart shows a spoon-like formation with a curve leading beyond the bump. The bottom is not a perfectly round shape due to the changing volatility as prices near the bump.
Note that there was upward momentum before the pattern was formed that pushed prices to highs of $18 before they began tumbling down. The horizontal arrow shows decreasing volume as the price trend forms a wedge-like pattern. It declines 26.5% to $13.23 before prices jump to new highs. The handle of the frying pan or spoon-like pattern is formed with a trendline sloping at an angle of 320. The angle of the trendline can range from 30-450. The trendline is drawn along the daily high prices until the buy signal is spotted after the bump.
The pattern has three distinct phases, 1) the lead-in section, 2) the bump phase, and 3) the run phase (see chart 1).
These three phases, as it will be seen, are crucial in calculating the price trend during trading. The lead-in phase gives the difference or height between the highest and lowest points of the trendline. The bump phase describes the region where price declines. At the beginning of the bump, there was a high volume due to the high selling pressure. At this point, selling is higher than buying, and the volume gradually subsides. After some time, the selling pressure abates as the stock recovers and reverses the downtrend.
The (uphill) run phase is the third section of the bump and run reversal bottom pattern. Prices begin to break out as traders are cognizant of the stock’s affordability and are willing to buy. Volume increases following the upward breakout made, and prices begin moving higher. The rising prices indicate an uphill movement or a steep run as buying pressure overtakes selling.
Is bump and run reversal bullish only?
The bump and run pattern is a double-edged sword that causes both bullish and bearish reversals. As such, bump and run reversals can be classified into the following types.
Types of bump and run reversal patterns
The bump and run pattern can develop as a bullish or a bearish reversal. The psychology of market participants is similar in general, whether the market is in a downtrend or an uptrend before the ultimate change of direction.
- Bullish bump and run patterns
A bullish bump and run pattern takes the form of the above-mentioned SLV example. It starts out as a regular, not too steep bearish trend. All of a sudden, prices fall dramatically in a steep downtrend, forming what is called the bump. Eventually, the momentum fades, and the price levels, before changing direction to begin a rally. The price may face some resistance at the original trendline and then break out even further upwards.
- Bearish bump and run reversal
A bearish bump and run is the opposite of its bullish counterpart. It starts out a regular bullish trend. Suddenly, prices embark on a steep incline away from the original trendline, forming the bump. Soon, they peak and start declining. When they reach the original trendline, they may find support for a while before continuing their downward tumble.
Chart 2: A bearish bump and run reversal pattern.
From chart 2, we can see the Johnson & Johnson stock was in a continuous uptrend from February to July of 2016. Volume and price both fluctuated intermittently but overall maintained the general trend. This was the lead-in phase.
In July, volume spiked as buying pressure increased, which drove prices up. This marked the beginning of the bump phase. As this phase continued, buying pressure waned, and sellers slowly started gaining traction. When the momentum of sellers and buyers was at equilibrium, the price stalled.
However, since it was increasingly becoming a seller’s market, the bears drove the price down, marking the beginning of the run phase. This downtrend confirmed the pattern when it broke past the lead-in support level.
Noticeably, there can be two bumps in the BARRB pattern. Traders should buy only after identifying the upward breakout.
Chart 3: Trading tactic using the BARRB pattern
In chart 3, there is a partial decline after the bump, then a second bump that initiates the breakout.
1. High target estimation
After identifying the BARR bottom pattern, you will identify the highest target by analyzing the highest target. In this case, the lead-in height begins at a high of $18 and a low of $12. You can compute this difference and add it to the highest target. A look at chart 3 shows that prices rose slightly below $26 before they fell and rose again to $26 on February 1, 2021.
At first, prices followed a bullish pattern from April 13, 2020, to August 31, 2020. Due to the second bump, prices hit a second follow-through by rising from $21 in November 2020 to $26 on February 1, 2021. In this case, two bumps show that the stock’s price may bounce twice after hitting resistance in a bullish run.
2. Buy after confirming price action
Purchase of the stock should only be made after confirming that the price has crossed the trendline identified from the lead-in phase. If you observe chart 3, the arrow from the lead-in phase intersects with the horizontal line at $13.23. Buying as indicated should begin from this phase for maximum profit and not at the first bump. Observe that the trendline formed from the lead-in phase is touching at least two points of the BARRB pattern to confirm the price close.
3. Sell near or at the old-high
A sign of weakness from the stock will make the price rise slightly towards the old high. In chart 2, the old high is at $17.40. Careful observation shows that the SLV stock hit this high in early 2017 during the formation of the BARRB pattern. This price movement is weak, and the trader should short or sell the stock. The trader can be uncertain as to the strength of the bump and if prices can rise past the old high. In such a situation, you can sell half or a portion of the stock as you observe performance.
Identify the support zone and place the stop-loss order at least 0.15 points (or 15 pips) from this section. You will need to move the stop-loss to the upside as the stock rises. Such criteria will help you not to lose money in case prices hit a sudden downtrend. In chart 3, you can decide to enter the trade to buy the SLV stock at $13.00 with the stop loss at $12.85. Your risk of loss will be limited by 15 pips. This move is essential since the trader gets maximum profit after a successful execution.
What happens after a bump and run reversal?
The first step after a bump and run pattern breaks out of the lead-in level, is it tends to attempt a retest. For a bearish bump and run pattern, the lead-in support level turns to resistance for the first few moments. In the same way, a bullish bump and run pattern retests the lead-in resistance level, which turns into support as it resumes its upward trend.
To have a clearer view of what happens after a bump and run reversal pattern is validated, Bulkowski came up with a means to calculate the most likely price target. He called this the measure rule. This rule can be very helpful for traders because it can help determine appropriate take-profit levels.
When this pattern has an upward breakout, the price is likely to hit the highest high or a level determined by the formula:
B + ((H – L) * 76%)
Where B is the breakout point, H is the highest high, and L is the lowest low in the trend.
Going back to chart 3, we can see the resulting uptrend hit the bump’s highest high in July.
Alternatively, for when this pattern culminates in a downward breakout, the following formula can be used to obtain our take-profit.
B – ((lead-in height) * 44%)
Chart 4: Bump and run pattern target price
Chart 4 is similar to chart3, showing the price action after this reverse pattern.
From the formula, our target price comes down to:
120.32 – (7*44%) = $117.24
When plotted on the chart, it is clear that the stock found support at this target price. This confirms its validity as an exit signal.
Bitcoin bump and run reversal example
From chart 5, we can see Bitcoin was in a moderately steep uptrend from December of 2020 till February the next year. This was the lead-in phase.
Chart 5: Bitcoin Bump and run reversal pattern
In February, buying pressure increased significantly, which saw the volume of purchased BTC spike. This caused prices to rally unexpectedly, causing a much steeper rally which formed our bump. This bump actually culminated into a new ATH for the coin when it hit north of $64,000 in April.
However, this rally did not last long, for days later, the prices had started to plummet. This bearish run found some support at the lead-in trendline before finally staging a bitcoin bump and run reversal breakout in May. This confirmed the reversal pattern and gave investors an ideal position to take their short positions.
Using the measure rule, we can calculate the safest place to place a take-profit order as follows:
B-((lead-in height) * 44%)
$53,658 – ($17,672.46 * 44%)
The result was around $45,900, which was hit a few days after the breakout.
Using indicators to spot bump and run reversal patterns
The bump and run reversal pattern is not a very common occurrence. For this reason, this pattern often slips by most traders or is simply just ignored. For this reason, we will attempt to use a bump and run reversal indicator to spot this pattern even before it happens.
For this trick to work, we need an indicator that mimics price movement while itself being a leading indicator. With these conditions, only one candidate comes to mind: the on-balance volume indicator (OBV).
The OBV is calculated by tallying cumulative volumes. This means adding volumes on up days while subtracting those of down days. It is represented as a line that looks more or less like the price curve if the latter was plotted on a line in place of candlesticks.
Further, as a rule of thumb, volume precedes price. Any price movement will have been observed on the volume scale several moments prior. For this reason, the OBV is a very effective leading indicator.
The way OBV works is it can give divergence signals, or it could be used to find support and resistance levels, as well as trend reversals. When the OBV is declining while prices continue to move upwards, that is a bearish divergence. Alternatively, if it rallies when prices are stuck in a downturn, it denotes a bullish divergence.
Further, since it resembles the price curve, it can be used to spot major support and resistance levels. Additionally, since it moves before the price, any trend reversals it undergoes are often closely followed by the price curve.
Now, let’s see how it can predict a bump and run reversal.
Chart 6: Bitcoin BARR prediction using OBV
From the chart above, we can see that Bitcoin went into a bump and run reversal pattern after hitting a new ATH in April. On close observation of the OBV, we can see that it more or less mimics price movements.
In the same way, although with a lot less flair for the dramatic, the OBV line also manifested a bump and run reversal pattern. As aforementioned, this pattern is confirmed when it breaks out of the lead-in trendline. On the price chart, this breakout happens in the first week of August. However, on the OBV chart, it breaks out on the 21st of July, giving us the signal a little more than a week prior.
It is important to note that not all signals from OBV are reflected on the price chart. After all, there are no certainties in trading securities. However, OBV trends represent investor sentiments and their level of confidence in the underlying security. This is why any moves on the OBV chart are more than likely to be mirrored on the price chart.
The bump-and-run reversal bottom pattern is used to indicate an incoming bullish pattern after a prior downtrend in stock/forex prices. In the same way, the BARR top pattern indicates a forthcoming bearish trend after a swift uptrend. The trader should observe the three main phases of the pattern, i.e., lead, bump and run phases, as strategic for dictating prices. The buy signal is given after confirming price movement from the lead-in phase towards the interjecting trendline. This makes the bump and run reversal chart pattern a vital weapon in any trader’s arsenal.