Encyclopedia of Chart Patterns. Thomas N. Bulkowski
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the bid, GTC [good till canceled] until 1 July 2012.” Two weeks later, I canceled the trailing stop of 14.64 and raised it to 14.91 because, “I think this is going to drop. It's a good earnings event pattern, and I don't want to ride it down a buck before it moves higher. Stop placed just below support.”
Four days later, I was out of the stock. “Sell reason: Hit stop. I was worried that the overhead resistance area would repulse shares and send the stock down after the good earnings event. I didn't want to ride it back down. My guess is this will drop but not much before resuming the up move providing the market moves higher. It has been [moving higher] but just by a little each day. If the market drops, which I expect, it should take this stock lower, too. But so far, I've been waiting for the general market to tank, and it hasn't.”
The stock did continue lower but only by 9% below my sale price. The stock peaked about a year later at 19.95 before sliding all the way down below 1 in April 2020.
I made 42% on the trade (including dividends), but it took just over 2.5 years to do that. However, that's almost 16% a year, which is quite good.
This lesson is worth repeating, though…
Lesson: If the stock closes within 3% [or pick a value] of the target, consider selling.
Southwest Airlines
Southwest Airlines (LUV) made a broadening top going into 2001. Prices in the following notebook entries have not been adjusted for the 3:2 stock split. On 26 January, “I bought at the market on a broadening top, price is at [the] lower trendline, but moving up. The [company is] successfully hedging their fuel costs. I expect oil prices to decline, FED [Federal Reserve] to ease interest rates next week, and economy to slowly rebound.
“I actually think this will be a loser trade, but broadening top chapter in new book [this one] says it is a strong candidate to buy. I expect a partial rise with downside breakout. Upside is formation top at 35, downside is stop‐loss at 27.30, call it 27.25, for a 10% decline. If it closes below 28, that is sell signal. Dump immediately. Filled at 30.39.”
I didn't buy exactly at the bottom of the broadening bottom (28.20), so that's something I can improve on.
Lesson: Try to buy as close to the optimum entry price as possible (the lower trendline in this case).
The stock continued to move higher, but halfway up the chart pattern, it stalled. That's common and wasn't a cause for concern until price started backtracking.
“12 February 2001. I sold at 31.18 because of a partial rise on the broadening top. Since I believe this is going down, there was no sense to wait for it to close below 28 before dumping. I made a small profit, about 2.5%.”
For a swing trade, I got in late and exited late, too, hurting the profit margin. Looking at the chart, the picture looks like a head‐and‐shoulders top. The partial rise is the right shoulder, and it's at the height of the left shoulder. I should have been prepared for the stock to turn lower there because of the mirror on the left side of the pattern.
Lesson: As price moves, pay attention to the surrounding price landscape for clues to how the stock may behave. Look for support and resistance areas where the stock might reverse.
Lesson: Play with price mirrors.
Price mirror: Pick a vertical turning point on the price chart and reflect the left side of the chart onto the empty, right side. The peaks and valleys on the right, in the future, might match the ones that happened in the past. It's better than sex when it works, and it gives you some idea of what the future could bring.
For example, if you were to flip the chart across the head of a head‐and‐shoulders top, you'd see that the right shoulder will match the distance and price of the left shoulder. You can continue the analysis for the rest of the chart, too, giving both price and time on the turns.
Sample Trade
“If you wait long enough,” Sandra sold me, “you get rewarded.”
My stomach growled. I was wondering if she'd reward me with a meal. She's a terrific cook. Instead, she pulled up Figure 11.5 on her computer screen.
Figure 11.5 Use the measure rule to compute the target price. First, compute the formation height from the highest high to the lowest low, then add or subtract the height from the highest high or lowest low, respectively. Depending on the breakout direction, the result is the expected target price.
“Two days after the stock bottomed [at A], I bought at 10.50. I placed a stop 15 cents below the bottom of the pattern [below A] for a potential loss of 6%.”
She applied the measure rule and was looking at a target of 14.25. If everything worked as expected, that would give her a profit of over 35%.
“When price paused here,” she pointed near the start of the flag, “I wondered if the trend was going to reverse. I thought about cashing out and running to the bank, but didn't. I decided to drive.”
She winked at me and smiled at her pun.
“The flag formed, and I hoped it would be a half‐staff pattern, meaning the flag was halfway up the move.” If that were true, she could expect a climb to 13.25 (that is the distance from the top of the flag (12.13) to the start of the move at 10.00 projected upward using the lowest low in the flag at 11.13).
A few days later, the stock not only fulfilled the measure rule for the flag, but for the broadening top as well.
“Did you sell?”
“No.”
“Why not?”
“Because the stock was moving up. I decided to let my profits ride. However, I did raise my stop to 11.85,” which was below the top of the flag and also below the high at B. “I thought it was a support area and hoped the stock would rebound before taking me out.”
“In mid‐February, just after the second peaked at 17, I saw a potential double top pattern. I raised my stop to 15 cents below the double bottom's confirmation point, or 14.25.”
About 2 weeks after raising her stop, her position sold when the stock plunged from the prior close at 15.63 to 12.13. After commissions, she made 33% in less than 4 months.
My stomach growled again.
“Yes, I'll feed you. I make this killer Swiss cheese, macaroni, and veggies casserole, lightly topped with toasted breadcrumbs. It has enough carbs to power the city. Let's go.”
She grabbed my hand, towed me to her kitchen, and handed me a carrot peeler.
“What's this?” I asked.
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