Price Patterns - A Cyclical Pattern Has a Distinct Upside an Downside

The cyclical price pattern is very easy to understand. A single price cycle has an upside during which prices rise to a peak and a downside when prices fall to a bottom. For some stocks this upside and downside pattern repeats again and again for many years. Cyclical price patterns occur in many stock sectors such as: chemicals, retail, natural resources, technology, and semiconductors.

The following example is for Kulicke & Soffa (KLIC), a cyclical semiconductor equipment stock. The price chart shows the weekly closing prices for KLIC from September 9, 1996 to October 5, 1998, which is one complete price cycle. The upside peaked at $27.59.

The cycle included 109 weekly closes for 5,886 (109*108/2) buy and sell combinations of which 2,501 (42.49%) were winners and 3,385 (57.51%) were losers.

Trades Summary
	All Trades	Buy Upside Sell Upside	Buy Upside Sell Downside	Buy Downside Sell Downside
Number Prices	109	52	109	57
# Trades	5,886	1,326	2,964	1,596
# Winners	2,501	1,213	1,068	220
# Losers	3,385	113	1,896	1,376
% Winners	42.49%	91.48%	36.03%	13.78%
% Losers	57.51%	8.52%	63.97%	86.22%
Average Return	10.73%	73.96%	2.06%	-25.70%
Lowest Return	-78.84%	-25.11%	-78.84%	-78.59%
Highest Return	515.09%	515.09%	508.11%	67.03%

2-Dimensional Percent Returns Chart

The color-coded display of the returns for the 5,886 trades delineates the three trade types by color. You can see that most (91.48%) of the buy upside and sell upside trades (green) are winners and fall above the red zero percent return line on the chart. These trades result in the largest percent gains. Most (86.22%) of the buy downside and sell downside trades (red) are losers and fall on or below the red line. The buy upside and sell downside trades (blue) are distributed over much of the chart area. But most (63.97%) of these trades are losers.

3-Dimensional Percent Returns Chart

The following 3-dimensional chart displays the pattern of percent returns for the 5,886 buy and sell combinations for the KLIC price series. Each profitable trade appears in green and each unprofitable trade appears in red.

The chart shows the returns of each of the 2,501 (42.49%) winning trades (green) and the 3,385 (57.51%) losing trades (red) as they are related to their buy and sell dates. Most of the winning trades in green occur for the buy upside and sell upside trades. Most of the losing trades in red are buy downside and sell downside trades and some losers are buy upside and sell downside trades.

How to Read the 3-Dimensional Percent Returns Chart

The buy axis runs from the back (1996) to the front (1998) of the chart. The sell axis runs from left (1996) to right (1998). The buy axis and the sell axis form the floor of the chart. No trades can occur in the gray area because the buy date is after the sell date or the sell date is before the buy date. The pattern of positive returns looks like a mountain range whose elevations are directly proportional to the magnitude of the percent returns. The negative returns lie below the floor and appear as shallow scooped-out valleys. The back left corner of the floor is the return for the first (lowest) buy price and its first sell price. The back right corner is the return for the first buy price and the last sell price.

Buy prices start at the lowest price of the series and increase to the peak along the buy price axis. After the peak price, the buy prices tend to decrease. The first (lowest) sell price is at the left side of the sell axis. Sell prices increase to the peak sell price and then decrease to the last sell price which is located at the right side of the sell axis.

The buy upside and sell upside trades are in the back left of the chart. The buy upside and sell downside trades are in the back right. The buy downside and sell downside trades are in the front right of the chart.

If you track the returns for one buy price, you will see the returns move up and down as the sell prices moves from left to right. The highest peak on the chart is the return for the first (lowest) buy price and the peak sell price. As you move from back to front on the buy axis, there are fewer trades for each buy price. And you can see the ridges of returns across sell prices for a given buy price.

The chart also shows the returns for a given sell price as you move from the first to the last buy price. For example, locate the peak return and follow the ridge of returns from the back to front of the chart. The peak return occurs for the first buy price. The lowest return, located next to the diagonal edge, occurs for the buy price just before the peak sell price. For all sell prices, the returns tend to decrease as buy prices increase on the upside.

Winners and Losers Map

Another way to view the winning and losing trades is to eliminate the relief from the 3-dimensional chart and simply plot all the trades as if you where looking straight down at the 3-dimensional chart. This perspective produces a flat 2-dimensional chart where areas of green represent winning trades and areas of red represent losing trades. In the KLIC winners and losers map 42.49% of the area is green and 57.51% is red.

3-Dimensional Chart of the Buy Upside and Sell Upside Trade Type

The 3-dimensional chart of the 1,326 buy upside and sell upside trades shows the 1,213 (91.48%) winners in green and the 113 (8.52%) losers in red. Most of the losing trades were short-term trades clustered near the diagonal axis. The highest returns occur for the earliest buy dates (lowest prices) and the dates (highest prices) near the peak of the upside. As the buy prices increase on the upside, the returns decrease.

3-Dimensional Chart of the Buy Upside and Sell Downside Trade Type

The green areas show the 1,068 (36.03%) winning trades and the large red area shows the 1,896 (63.97%) losing trades. The largest percent returns occur for the lowest buy prices early in the upside that are sold as the highest prices just after the peak. And all of the early upside buys are winners as shown by the continuous green area at the back of the chart. As the upside buy prices become higher, fewer and fewer of the downside trades make money.

3-Dimensional Chart of the Buy Downside and Sell Downside Trade Type

The large area of red shows the 1,376 (86.22%) losing trades for the buy downside and sell downside trade type. Only 220 (13.78%) trades were winners. Most of the winners appear in the large cluster of buys and sells that occurred during the price rebound in early 1998. The other green clusters represent short-term trades associated with brief price rises on the downside.