What is a Point & Figure Bullish Catapult pattern?
The P&F Bullish Catapult pattern is a hybrid by nature of its development process. This rare buy signal evolves from a Triple, or Quadruple Top, that fails to follow-through. Price direction reverses soon after the breakout, back to the confines of the preceding price range. Trading retreats to the lower half of its prior range but no deeper than its floor. Price then recovers, printing a 3 box reversal up, advancing northwards once again. A price rally breaks above the prior column of Xs, the column responsible for the Triple or Quadruple Top, to form a Double Top. That Double Top pattern, itself contained in the Catapult pattern, thereby provides overall signal activation. With resistance now cleared desively, a sharp rally initiates.
Psychology of a Bullish Catapult
The Bullish Catapult pattern is an emotional roller-coaster for novice investors. Nerves of steel, and experience, are required to play the pattern successfully. The initial upside breakout spurs greed, yet the price rapidly slips back, leading to regret. The retreat, back into the range, then draws the interest of short traders. However, the shorts soon suffer pain as the price turns back to the upside, and breaks up through resistance, thereby activating the catapult pattern. By nature of the pattern's width, many traders are committed, consequently an aggressive short-squeeze ensues. Bearish positions that entered during the range-bound phase are forced to accept a painful loss as the price rapidly accelerates to the upside.
How to Trade the Catapult?
Following the completion of a Point & Figure Catapult signal, further investigation of the chart is imperative.
- The primary price trend for the stock or index must be up. Trading should be above a P&F bullish trendline.
- During a bear market, the pattern could fast become a Bull Trap.
- The only time you would consider trading the pattern without a bullish up trend is when the Catapult occurs across a major support shelf. However, that in itself would be speculative, so leaner allocation would be appropriate.
- Look for other buy signals preceding the Catapult, lower down the chart. Successful buy signals over the prior months, and years, will collectively add conviction to the present bullish case.
- A bullish relative P&F chart is desirable. The relative chart should be trending up on a medium to long-term basis. The only time a weak relative chart would be considered is when the ratio has successfully found a long-term relative horizontal support level but again that would be somewhat speculative.
- As with any trading pattern, sentiment should also be evaluated. If the pattern formed over a period of bad news-flow, the signal will be more powerful. Short sellers on the news will need to cover and that will fuel the upside extension.
Entry is best sought a few days, to couple of weeks, following P&F Catapult activation. Breaks of resistance are often volatile, with swings in either direction. Watch to enter a long position on a downswing, providing no P&F sell signal is generated, as that would negate the Bullish Catapult.
Presence of a Bullish Catapult signal during a bear market should be treated with skepticism. Very often a bullish catapult in this environment will morph into a Bull Trap. Hence, the signal is best followed during an established bull market.
Be cautious if the Bullish Catapult occurs during an indecisive rangebound general market. The catapult will struggle to follow-through to the upside, culminating in failure.
Where to place a stop-loss?
With the pattern activated, as the uptrend extends, the stop should be trailed higher to the box just beneath the next completed column of Os, a retreat. A pull-back of Os would be considered complete when a 3 box reversal prints a X column back to the upside.
Determining an upside price target?
A horizontal count is the ideal method to calculate an upside price objective. Broad patterns such as this often result in a prolonged and powerful up move.
Bullish Catapult Explained by Example
Catapult pattern development across moving average
Advanced Micro Devices consolidated across its rising 30-week moving average during 2019. The long-term uptrend consolidation took the form of a Bullish Catapult. The catapult signal activated in November 2019. In doing so, the primary uptrend resumed.
Pattern formation mid-trend
Steve Madden formed a tidy Bullish Catapult over the summer of 2018. A Quadruple top reversed after breakout, the price retreated to the range floor. A 3 box reversal up then propelled the price back up to the range ceiling, with the catapult activating in mid-August. A multi-month rally followed.
Deep retraction following initial upside failure
Early August 2018 saw a Bullish Catapult signal print on the S&P 500 Transportation Index chart. Observe the deep retraction following the failed Quadruple Top. The upside failure broke higher by three boxes. Following the retraction, the index resumed its up trend, pushing out to a new all-time high of 820.95 in late September 2018. However, the broader market weakened, pulling the transports back down into year end.
Development above a Bullish Trendline
Iridium Communications confirmed a Bullish P&F Catapult pattern at the start of August 2018. As is often the case, the formation occurred above a notable Bullish Trendline. The price duly extended higher, hitting a peak of $24 in October 2018.