The bump and run reversal bottom (BARRB) 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%.
Identification of the pattern
Figure 1: Bump and run reversal bottom pattern
Figure 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 figure 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 is 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 BARRB 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.
Figure 2: Trading Strategy using the BARRB pattern
Noticeably, there can be two bumps in the BARRB pattern. Buy trading should only commence after identifying the upward breakout. In figure 2, 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 figure 2 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 done after confirming that the price has crossed the trendline identified from the lead-in phase. If you observe figure 2, 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 figure 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 figure 2, you can decide to enter the trade to buy the SLV 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.
The bump-and-run reversal bottom pattern is used to indicate an incoming bullish pattern after a prior downtrend in stock/ forex prices. 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.