On 19 June 2008, Onesteel Limited (OST.AX) reached an all-time high of 7.880 after a steady and consistent rise in the prior years. Price activity ranged for a time close to the high but never duplicated the feat before transitioning into a downtrend. As it was with many stocks, however, the pending global economic downturn later that same year was not kind to Onesteel Limited. In the three years since reaching its all-time high, OST plummeted before rebounding and reaching a new two-year high of 4.100 in April 2010. The following chart chronicles that high and the price movement since.

trading.com.au/wp-content/uploads/2012/01/Analysis-Onesteel-Limited-112311.gif”> What would have been cause for buyer optimism in April 2010 quickly turned to more of the same as the stock returned to its bearish ways. While there was a degree of indecision in the market as evidenced by the slightly turbulent nature of the price action, OST managed to form the Lead-In phase to a Bump and Run Reversal Top. Traders who caught this pattern would have had renewed hope for an imminent bullish reversal.

Bump and Runs were discovered by Thomas Bulkowski, a well-known trader and technical analyst. They behave as reversals of the existing trend more often than not and can appear in both bull and bear markets. Bulkowski has noted that this is one of the rare patterns to perform well in either market, typically producing a strong breakout with sustained trends and good gains. Bump and Run Reversal Tops most frequently appear in uptrends and act as bearish reversals; however, with OST the Bump and Run Reversal Top appears in a downtrend and behaves as a bearish continuation.

After the Lead-In phase comes the Bump phase. The Bump is when this pattern begins to reveal the high probability that the market will soon reverse price trend. After the Bump crests, it returns to the trend line, breaking it and continuing to fall thereafter. When price breaks the trend line, this is known as the Run phase.

One important characteristic of Bump and Runs is that of the distance from the trend line to the Lead-In and Bump phases. Bulkowski has stipulated that from trend line to Lead-In the distance can be no more than half of the distance to the Bump. Anything greater than 50 percent disqualifies the pattern as a Bump and Run. In the case of OST, the pattern meets the requirements and can be traded as a legitimate Bump and Run.

The Run phase returns to the trend line, a phenomenon not unheard of with this pattern. In fact, price breaks the trend line again and trades above it for a time. This is known as a Throwback, and they are common with Bump and Runs. While the pattern confirmed when price broke trend and entered the Run stage, Bump and Runs can be considered failures based on price direction following the Run. Simply stated, if price does not continue to trend in the same direction as the Run phase, even after a Throwback has occurred, then the pattern has failed.

This does not happen with OST. Price breaks trend and begins trading in the same direction as the Run portion of the pattern. The gains are good for those going short as price free-falls from 1.757 to below 0.75 per share. Shorts should have entered after the Bump phase began its downward movement, holding the position during the throwback in anticipation of a return to trading below the trend line. For the time being, it appears the bears are in control as price drops to new lows.

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