What is a Point & Figure Bearish Catapult?
The Bearish Catapult is a rare Point & Figure sell signal. The pattern evolves from a Triple or Quadruple Bottom breakdown. Neither of the breakdowns see downside follow-through. A 3 box reversal prints after just one box of travel. Trading then returns to the confines of the prior trading range but no bullish breakout results. The price rolls over again via a 3 box reversal south. A fresh down O column homes in on the range floor. The price breaks beneath the prior column of Os, the column responsible for the failed Triple or Quadruple Bottom, to activate a Double Bottom. That final breakdown provides overall Catapult activation. Price then deteriorates at speed.
Psychology of the Bearish Catapult
Traders attempting to play the Bearish Catapult ahead of confirmation experience an emotional seesaw. This, along with its sibling the Bullish Catapult, is the most volatile P&F pattern during the development cycle. Price direction is all over the chart ahead of the final breakdown, a simple Double Bottom. The pattern's build up involves a bluff, the failed Triple or Quadruple Bottom. Traders who shorted on that signal then cover, only to see the price break back down again in the direction they originally played for. Frustrated traders may well miss the final downside reassertion through having their fingers burnt on the earlier failed breakdown.
How to Trade a P&F Catapult?
The Bearish Catapult Point and Figure pattern is best traded post activation. However, that is easier said than done, since the breakdown following activation is often swift given the pattern's collective column width. Nonetheless, the strategy is patience, timing short entry to a possible counter-trend snap-back, providing no buy signal is generated.
Additional sell signal confirmation is necessary by seeking further supporting evidence from the chart and market climate.
- Ensure the stock is contained in a bear market or correction. Trading beneath a bearish trendline will be a strong indication of that being the case.
- Avoid this signal with a barge pole should one appear in a bull market, high probability it will rapidly morph into a Bear Trap.
- A series of bearish Point & Figure patterns preceding the Catapult will greatly add downside confidence with respect to short positions.
- A falling relative ratio P&F chart is always desirable when following price sell signals. Trending down on a medium to long-term basis is a sure sign the stock is an underperformer. Consequently, being short a weak stock is the right thing to do!
- Sentiment understanding is vital for any sell signal. Should the Bearish Catapult activate during a period of good news-flow, the pattern will be empowered. When a stock falls on good news, it is perhaps one of the most compelling reasons to sell. If the price cannot rise on good news, there is little hope, at least until a major change.
Appearance of a Point and Figure Bearish Catapult during a bull market should rarely be trusted. Watch for a Bear Trap to emerge from the catapult's remnants.
During an indecisive rangebound market, with no clear bull or bear market case, caution is also necessary. The catapult will struggle to follow-through to the downside, leading to truncation or failure.
The Bearish Catapult should only ever be played on the short side when the P&F chart is in an established bear trend.
Where to place a stop when trading a P&F Catapult?
Following activation, then short trade entry, a stop-loss is best placed one box above the prior column of Xs. That column would be the snap-back following the failed Triple Bottom, or Quadruple Bottom, element of the pattern.
Trailing a stop-loss lower with a trend is good practice. Following a completed counter-trend move, lower the stop to one box above the column of Xs formed by the dead-cat move.
Determining a price target?
The P&F Bearish Catapult has impressive width thanks to the wild column swings during its development. As a result, a horizontal count is fit for purpose with regards price objective calculation.
Bearish Catapult Explained by Example
Catapult failure example
Molson Coors Brewing confirmed a Bearish Catapult in August 2019. However, the signal failed to complete its price objective since the pattern occurred in the mature stages of a downtrend. A bullish Triple Top breakout on September 30th 2019 negated the catapult.
Bearish Catapult as an index peak
We highlighted the potential for a Bearish Catapult on the NYSE Composite chart in a November 2018 research report. The pattern became a reality in mid-December 2018. The break lower was swift, with a correction low of 10800 by month end, a drop of almost 1000 points.
Pattern preceding major price drop
The PHLX Service Index produced a variant of the Bearish Catapult in August 2018. A failed Spread Triple Bottom preceded eventual activation of the catapult. A hugely successful signal bearing in mind that the index is trading over 50% lower as of October 2019.
Chevron generated a Bearish Catapult sell signal in September 2018. We highlighted the chart in a research report at the time. Subsequent trading saw a correction box low of $102 in late December 2018.
Weakness in crude oil is partly attributed to price drops by Chevron. Therefore, we would analyze possible bearish pattern activity on the Point and Figure chart of Crude Oil. An example of the value of garnering supporting evidence when drawing conclusions on a stock chart, Chevron in this case.