“Scallops” are J-shaped patterns that form in ascending and descending markets. In ascending “Scallop” (Bullish) formations, the pattern resembles a “J” letter and has a rounded bottom with a steep ascent. In descending “Scallop” (Bearish) formations, the pattern looks like a “Mirror Image of J.” Usually the volume between the top peak and the bottom “J” peak resembles a “U” shape formation. In ascending and descending “Scallop” formations, the higher “Scallop” size or lower “Scallop” size becomes smaller as they progress. “Scallop” patterns are relatively easy patterns to trade and have a moderate success rate compared to the “flags” or other continuation patterns.
Trade: Descending Scallop patterns are visible once the bottom part is made and the price starts to rise. Also, descending “Scallops” are potential short trades once prices trade below the low of the “curved bottom.” In ascending “Scallops,” after the first “J” Scallop formation, a retracement is needed for another “J” Scallop. Depending on the market strengths, the retracement is from 38% to 62%, and hence the failure rate in ascending patterns is relatively higher than descending “Scallops.”
Stop: In descending “Scallops,” the trade is initiated below the low of the pattern. If the prices rise back above the right side of the “J” peak, then the pattern is considered as a failure. In ascending patterns, a “stop” is placed below the low of the “J” pattern.
Target: Targets are usually at the height of the “J” pattern from trade entry. For ascending patterns, the height of the “J” shape is added to the entry. In descending patterns, the height of the “J” shape is subtracted form the entry.
Trading Scallops (Ascending) Pattern
Trading Ascending Scallop Pattern
The example above illustrates an “Ascending Scallop” pattern from Amazon’s daily chart. Amazon formed its first ascending “Scallop” from $36 to $42. A retracement is needed for this pattern to trade another upside “Scallop” pattern. After a steep decline, Amazon formed a round bottom at $37 to $39. Once the pattern started to breakout of the round bottom, it gave an opportunity to enter a “long” trade.
- Enter a “long” trade above the right side hump at level A ($39).
- Place a “stop” order below the low of the second “Scallop” bottom ($37).
- Targets are placed at the height of the first “Scallop” from level B ($42).
Trading Scallops (Descending) Pattern
Trading Descending Scallop Pattern
The example above illustrates a “Descending Scallop” pattern formation from the XM Satellite (XMSR) daily chart. XMSR formed its first descending “Scallop” in March 2006 as it declined from the peak of $30.50 to a low of $20. In April 2006, XMSR retraced above $24 and started to decline to form another descending “Scallop.” The first “Scallop”‘ height was $10 and the low was at $20.
- Enter a “short” trade below the low of the Scallop at $20 (level A).
- Place a “stop” order above the high of the “Inverse J” at $24 (level B).
- Place a “target” at the height of the “J” shape from level B to $14 (level C).
Source : “Trade Chart Patterns Like the Pros” by Suri Duddella