Bump and Run Reversal

Thepattern was originally named the Bump and Run Formation, or BARF. Bulkowskidecided that Wall Street was not ready for such an acronym and changed the nameto Bump and Run Reversal. Bulkowski identified three main phases to thepattern: lead-in, bump, and run. We will examine these phasesand also look at  ForexSignals  volume and pattern validation.

1.      Lead-in Phase: The first part ofthe pattern is a lead-in phase that can last 1 month or longer and forms thebasis from which to draw the trend line. During this phase, prices advance inan orderly manner and there is no excess speculation. The trend line should bemoderately steep. If it is too steep, then the ensuing bump is unlikely to besignificant enough. If the trend line is not steep enough, then the subsequenttrend line break will occur too late. Bulkowski advises that an angle of 30 to45 degrees is preferable. The size of the angle will depend on the scaling (semi-log orarithmetic) and the size of the chart. It is probably easier to judge thesoundness of the trend line with a visual assessment.

2.     Bump Phase: The bump forms with a sharp advance, andprices move further away from the lead-in trend line. Ideally, the angle of thetrend line from the bump's advance should be about 50% greater than the angleof the trend line extending up from the lead-in phase. Roughly speaking, thiswould call for an angle between 45 and 60 degrees. If it is not possible tomeasure the angles, then a visual assessment will suffice.

3.     Bump Validity: It is importantthat the bump represent a speculative advance that cannot be sustained for along time. Bulkowski developed what he calls an “arbitrary” measuring techniqueto validate the level of speculation in the bump. The distance from the highesthigh of the bump to the lead-in trend line should be at least twice thedistance from the highest high in the lead-in phase to the lead-in trend line.These distances can be measured by drawing a vertical line from the highesthighs to the lead-in trend line. An example is provided in the chart below.

4.     Bump Rollover: After speculationdies down, prices begin to peak and a top forms. Sometimes, a small double top ora series of descending peaks forms instead. Prices begin to decline towards thelead-in trend line, and the right side of the bump forms.

5.     Volume: As the stock advances during the lead-inphase, volume is usually average and sometimes low. When the speculativeadvance begins to form the left side of the bump, volume expands as the advanceaccelerates.

6.     Run Phase: The run phase begins when the patternbreaks support fromthe lead-in trend line. Prices will sometimes hesitate or bounce off the trendline before breaking through. Once the break occurs, the run phase takes over,and the decline continues.

7.     Support Turns Resistance: After the trendline is broken, there is sometimes a retracement that tests the newfoundresistance level. Potential support-turned-resistance levelscan also be identified from the reaction lows within the bump.

The Bumpand Run Reversal pattern can be applied to  ForexSignals  daily, weekly or monthly charts. As stated above, the pattern isdesigned to identify speculative advances that are unsustainable for a longperiod. Because prices rise very fast to form the left side of the bump, thesubsequent decline can be just as ferocious.

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