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Figure 5.2 This bullish bat rises after point D, but breaks out downward at E.

      For example, the low at point X is 9.76. The high at A is 12.90, and the high–low range at B is 11.81 – 11.40. The AB/AX ratio using the high at B would be (12.90 – 11.81)/(12.90 – 9.76) or .35. Using the low price at B would give (12.90 – 11.40)/(12.90 – 9.76) or .48. The .382 number nestles comfortably between .35 and .48, so XAB is a valid turn.

      CB/AB retrace. In a similar manner, I use the high at A, low at B, and high–low range at C (12.57 to 11.98) to qualify the CB/AB retrace. Plugging in the numbers we get a range of .39 to .78. That range must encompass one of the numbers listed in the table, and it does. In fact, several of the numbers listed fall within that range. Although such a large range might seem like the recognition rules are lax, only a few patterns qualify. Let's continue with the CD extension.

      CD/CB extension. CD is longer than CB, so we call that an extension and not a retrace. Let's go through the math for this one. It follows the same rules as before. I use the low at B, high at C, and the high–low range at D to qualify the three points. D is at 10.81 to 10.19. Plugging them into the equation, we get (12.57 – 10.81)/(12.57 – 11.40) or 1.50 using the high at D. The low at D becomes: (12.57 – 10.19)/(12.57 – 11.40) or 2.03. Two numbers fit that range: 1.618 and 2, so the turn qualifies.

      AD/AX retrace. For the last turn of the bat, I don't use the high–low range. Rather, the number must be within .03 of the target .886 value (using the low at D only). So we get (12.90 – 10.19)/(12.90 – 9.76) or .86, which is within .03 of the .886 target. This pattern qualifies as a valid bullish bat, but your software may use a different algorithm and find a different result.

Volume. The bullish bat doesn't have a volume requirement. Rather, you'll see volume recede from point X to D (the width of the pattern) most of the time. I'll discuss volume in the Statistics section. Point F in the figure shows a downward volume trend.

      Duration. There are no rules limiting the width of the pattern, but I limited them to six months.

Focus on Failures

      Figure 5.3 shows a bullish bat that fails to be bullish. I show the five turns at XABCD. It's a valid bullish bat even though it looks weird. Price at D should see the stock turn higher, but it doesn't. It does form a minor low, but that doesn't translate into any meaningful rebound in the stock.

      Instead of turning upward at D, the stock continues lower, breaking out downward at E. Price continuing lower at D (instead of turning upward) is the first type of failure.

      The second type of failure is when price does turn upward at D, but doesn't climb far. I consider a move no more than 5% to be a failure. Figure 5.3 shows this type of failure, too, because price climbs just 3% after D.

      Five percent failures only happen about 10% of the time, so they are a concern, but not a huge one.

      Let's talk about statistics next.