Chart patterns and candlestick setups
Does a tight base after a sharp drop work?
Rejected Pre-registered and tested, July 2026
Removing the base conditions improved the result. The base was the problem.
What the pattern claims
A fast decline — at least 8% over five sessions — followed by a tight five-day base. The base has small candles relative to the decline, never undercuts the low of the drop, and shows volume sloping up. The claim is that a stock which falls hard and then refuses to fall further is being accumulated.
How we tested it
697 clean occurrences across 402 S&P 500 companies, with enough cases in every era to read separately.
Every study here was pre-registered: the exact rule, the pass and fail thresholds and the data window were written down and cryptographically fingerprinted before the test was run. That makes it impossible to move the goalposts after seeing the answer.
Results assume you buy at the next morning's open, not at the closing price that triggered the signal, and they include companies that were later delisted or went bust. Returns are measured against what the rest of the market did on the same days, so a rule that made money only because it fired on days everything rose scores zero here.
What happened
−0.39% at 60 days over the full period, and −1.62% in the second era, where the median case lost 3.70%.
As with the bull flag, the ordering of the pieces is the finding. All three consolidation conditions subtract. Removing the small-body requirement improved the result by 0.91 percentage points. Removing the requirement that the base hold above the low improved it further. The full pattern, with every condition satisfied, was among the worst arms we measured.
What it means
The sharp drop is the only part of this setup with any claim to doing work, and even that claim did not survive. Our first reading credited it with a small positive contribution. When we re-ran the study under a stricter standard for cleaning bad price data, that contribution went to approximately zero and changed sign. We withdrew the sub-claim. It should be read as nothing.
Put beside the bull flag, this is the more interesting result. The two patterns approach consolidation from opposite directions — one after a rise, one after a fall — and both reached the same conclusion, on different data. Consolidation as price geometry has now been measured twice and had negative value both times. The tight base is not a neutral filter you can leave in for comfort. It removes the cases you wanted.
A rejection is not "this never works"
It means: tested on this universe, over this period, against a bar written down in advance, it did not clear the bar. Where a test lacked the power to decide either way we record it as undecided rather than rejected. The full research ledger has all 192 experiments and what the failures have in common.
Other patterns we tested
- Does the bull flag pattern work? The pole is the only live part of the pattern. Every flag condition made the result worse.
- Does MACD divergence work? The loose version changed the outcome by less than one hundredth of a percent. The strict version widened both tails.
- Does breakout and retest work? The setups the rule throws away outperformed the ones it keeps.
- Does buying the dip after a spike work? The first pattern in this family to lose money significantly rather than merely do nothing.
- Does a big RSI drop mark a buying opportunity? The family's only statistically significant result, and it vanished completely once we accounted for when it fired.
- Do three shrinking red candles signal a bottom? The only chart pattern that beat all its own control groups — and it still could not clear the error bars.