Broadening Tops, Megaphone, Reverse Triangles, or Funnels

Broadening patterns are sometimes called megaphones, reverse triangles, or funnels. Prices expand in range (range = high prices – low prices) over time and are the opposite of the triangle and pennant patterns.

The broadening top occurs when prices enter into the pattern from below during an uptrend. Prices then make higher highs and lower lows, each at least two times to create the proper support (line drawn below the lows, sloping down and to the right) and resistance (line drawn above the highs, sloping up and to the right sloping) that make the megaphone "<" look.

Broadening Tops Breakout Direction and Average Gains and Declines

Prices breakout above resistance about half the time and below support the other half of the time; when prices breakout above resistance (triggering a buy signal), prices have an averaged maximum gain of 29% before any correction of 20% or more; when prices breakout below support (triggering a sell signal), prices have an averaged maximum decline of 15% before a counter-breakout trend 20% correction (Bulkowski, 2005). Note that Bulkowski (2005) suggests another set of buy and sell signals, namely that a trader should buy the third successful touch of support and sell at the third successful touch of resistance.

Broadening Bottoms, Megaphone, Reverse Triangles, or Funnels

The broadening bottom is similar to the broadening top except that the broadening bottom occurs after a downtrend.

Broadening Bottoms Breakout Direction and Average Gains and Declines

Prices in the broadening bottom pattern breakout above about 53% of the time and breakout below about 47% of the time; when prices breakout above, prices eventually rise to an averaged maximum gain of 27% before the first 20% reversal; and when prices breakout below support, prices decline by an averaged maximum of 15% (Bulkowski, 2005).

Potential Problems with Broadening Pattern

Kirkpatrick & Dahlquist (2010) find many faults with the broadening pattern which include:

• For a breakout above resistance, prices are constantly making higher highs without any buy signal being triggered, reducing the potential gain from the eventual buy trigger; the same concept applies for breakouts below support, where prices are constantly making lower lows, reducing the size of the expected breakout move when it occurs.
• Because the range is so large after a broadening pattern, realistic places to put stop losses are quite far from the breakout price, increasing risk.
• Broadening patterns are rather rare and "are often difficult to identify".
• Performance is average at best, with the only top performer being the ascending broadening wedge.

Price Targets

Typically, the height of the broadening top or bottom is added to the breakout above resistance or subtracted to the breakout below support to arrive at a price target. However, Bulkowski (2008) offers the following calculated price targets based off of his historical chart research:

Broadening Top Chart Example

The chart above of Chevron (CVX) shows a broadening top during an uptrend. Prices enter from below (trait distinguishing a broadening top from a broadening bottom) and then create two higher highs and three lower lows forming the minimum requirement for the downtrending support and uptrending resistance lines. Prices break above the overhead resistance trendline and continue the move higher, profiting from either price target calculation used: the height of the pattern plus breakout price or height of the pattern multiplied by 62% and then added to the breakout price above resistance. Bulkowski (2005) found that broadening tops that occur in an intermediate-term trend (between three and six months) perform better. The chart above occurs after a three month uptrend.

Broadening Bottom Chart Example

Again, the chart of Chevron (CVX) contains a broadening pattern, in this case a broadening bottom pattern because prices enter the pattern from above. There are three higher highs and four or five lower lows. Prices break below support and move downward enough to complete a profitable trade using either price target method.

Works Referenced

1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
4. The Pattern Site. (2005). Bulkowski's Broadening Bottoms . Retrieved June 1, 2012, from http://thepatternsite.com/broadb.html
5. The Pattern Site. (2005). Bulkowski's Broadening Tops . Retrieved June 1, 2012, from http://thepatternsite.com/bt.html