Pipe Top Chart Pattern

Pipe Tops occur after a short-term uptrend and consist, on a weekly chart, of two taller than normal price spikes with roughly equivalent high prices. A sell signal is triggered when price closes below the lowest low of the two spike price bars.

Pipe Bottom Chart Pattern

In contrast, a Pipe Bottom occurs after a short-term downtrend and consists of two taller than average weekly price spikes with similar low prices. Note that Bulkowski (2005) finds that the two "pipe" price bars share on average 66% of the same price levels and don't necessarily have to bottom at the same price level. A buy signal is triggered when prices close above the highest high in the pattern. Kirkpatrick & Dahlquist (2010) point out that the pipe tops and pipe bottoms should stand out from the prior trends, this means that for pipe tops, the price bar before and price bar after should have their high price at the bottom price area of the pipe top price bars; conversely, the price bar before and after the pipe bottom should have their lows near the top price area of the pipe bottom bars (p. 374).

Average Max Breakout Decline - Pipe Top

According to Bulkowski (2005), the average decline after a sell signal is triggered for the pipe top formation and before any 20% reversal correction is a decline of 20%;

Average Max Breakout Gain - Pipe Bottom

The average gain after a buy signal is triggered for the pipe bottom formation is a gain of 45%; in fact, Bulkowski ranks the pipe bottom the second best performing pattern and the pipe top the fourth best performing pattern of 23.

Pipe Price Target

The suggested price target for pipe tops and pipe bottoms given by Bulkowski (2005) is shown below:

Important Traits that Increase the Effectiveness of the Pipe Pattern

Traits that increase the effectiveness of the pipe pattern are given next (Bulkowski, 2005):

• Longer pipes are superior
• The best pipe tops occur at the top of a retracement in a downtrend; but avoid pipe tops that appear after a very long downtrend
• The best pipe bottoms occur at the bottom of an extended downtrend (over 6 months long)
• Pipes with a lower left spike perform best (i.e. for a pipe top, the first price bar's high is less than the second price bar's high; for a pipe bottom, the first price bar's low is less than the second price bar's low)
• Pipe tops that occur within a third of the 52-week low perform best
• Pipe bottoms that occur within a third of the 52-week high perform best

Pipe Top Chart Example

The chart above of the 20+ Year Treasury Bond ETF (TLT) illustrates a pipe top. As is typical with the pipe top formation, the first day starts near the low of the price bar and then closes near the high. The second day is the reverse, opening near the high and closing near the low. When prices closed below the low of the pipe top formation, a sell signal was triggered.

Pipe Bottom Chart Example

The weekly chart of the S&P 500 ETF (SPY) illustrates a pipe bottom. Notice that the pipe bottom has many attributes Bulkowski (2005) found to be desireable: the pipe bottom occurs after a very long downtrend (518 days from highest high to pipe bottom); the pipe bottom bars are taller than the average price bar; the left pipe is slightly lower than the right pipe; and the price bar prior to the pipe bottom and after it are at the top end of the price range of the pipe bars making the pipe bottom pattern stand out visually on a chart. Once prices on the weekly price bar surpassed and closed above the high of the pipe bottom pattern, a buy signal was triggered.

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 Pipe Bottoms . Retrieved June 1, 2012, from http://thepatternsite.com/pipeb.html
5. The Pattern Site. (2005). Bulkowski’s Pipe Tops . Retrieved June 1, 2012, from http://thepatternsite.com/pipet.html