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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
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Busted
Patterns
Candles Chart
Patterns
Event
Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 09/20/2017
22,413 41.79 0.2%
9,654 147.29 1.5%
732 -5.08 -0.7%
6,456 -5.28 -0.1%
2,508 1.59 0.1%
YTD
13.4%
6.8%
10.9%
19.9%
12.0%
Tom's Targets    Overview: 09/14/2017
22,450 or 21,500 by 10/01/2017
9,750 or 9,200 by 10/01/2017
775 or 730 by 10/01/2017
6,650 or 6,200 by 10/01/2017
2,600 or 2,425 by 10/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

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Sunday, 8/31/2008. Patternz bug fix.

To those of you that have written to say that the chart pattern indicator picture on the website does not match that given by patternz, you are correct. I have a new version of patternz (version 4.1j) that actually makes things worse, at first glance. When you get the new version, change the threshold from 35 to 37 and if the rest of your setup is the same as mine, you will get the same picture. Unfortunately, you may need to play with the threshold in the future to get a chart like mine because my setup uses slightly different data than yours.

-- Thomas Bulkowski


Thursday, 8/28/08. Learn How to Trade Mutual Funds.

A picture of a wasp from my garden.

Since I have no chart today, shown is a wasp visiting one of the flowers in my back yard earlier this year. Obviously, he is looking for a good stock to buy.

I finished reading the book, Winning the Day Trading Game, by Thomas Busby with Patsy Busby Dow. What I found exciting was near the back of the book when they discuss mutual funds. I plan to research his idea and present my results in a few weeks in the form of a test portfolio. But first, I have to finish the testing I am doing now on the recovery of stocks after a large decline. I hope to release a test portfolio on that as well.

Here are Busby’s list of rules for trading mutual funds.

  1. Find the top 10 performers of the prior year.
  2. Remove the top two performers from consideration (not the bottom two).
  3. Put 80% of your mutt fund money into those eight.
  4. After 3 months, sell the worst three performing funds and distribute the proceeds into the other five funds.
  5. In another 3 months, close out the bottom two worst performing funds and reinvest into the remaining three funds.
  6. If any of the funds are up by 10%, then either sell them if the market looks like it might weaken or sell half of them and ride them up a little longer.
  7. At the end of the third quarter (that is, after 3 more months go by), sell the worst performing fund and reallocate the funds to the remaining two.
  8. At year’s end, go into cash and start the process again.

What Busby is doing is eliminating the weak mutual funds and buying the strong ones. When his profit target of 10% is met, he sells the fund and either goes into cash or pulls out half of the money.

Since he only invested 80% of his funds, he puts the other 20% into index funds. He explains that "I begin each year by recording the opening price of the S&P 500 and Nasdaq 100 Futures. I calculate a 2.5% deviation up and down from the opens. If either of these levels is achieved, I trade the index funds either long or short, as indicated." He says that he puts 66% to 75% of the cash into the stronger index fund and the other in the weaker performing fund. "If the market goes against me, I exit the position when the market goes 2.5% above the yearly open" (assuming that the market dropped by 2.5% initially). Then he waits for the start of a new quarter and begins the index fund selection again. You can find details of this on page 120 of his book.

-- Thomas Bulkowski

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Wednesday, 8/27/2008. Cautionary Tale: Alternative Energy

Chart of Evergreen Solar (ESLR) on the daily scale.

FULL DISCLOSURE: About two months ago, a financial consultant asked my opinion about this stock. I don’t know if she or anyone else owns the stock. I am not advocating buying the stock, just presenting the information because I do not have anything else to discuss today.

The chart shows Evergreen Solar (ESLR) on the daily scale. After peaking at $18.85 in December 2007, the stock plummeted and hit a low of 7.52 in March 2008, a decline of 60%. Since then, the stock has stayed mostly between two rising red trendlines, but is easing below the bottom one recently.

As the price of oil rises, it makes alternative energy plays such as Evergreen more attractive. Higher demand for their products coupled with the lower costs often associated with rising production volume suggests that profits will rise. If earnings go up, so should the stock. That is the theory. Let’s look at some noteworthy events that have happened this year.

On February 12, the company offered 16 million shares of common stock to the public at a price of $9.50 per share. The stock closed today at 9.38, so it hasn’t gained much over the 6 months. The offering was for 20 million, but the company was concerned about the dilution of earnings that additional shares would represent, so they cut the offering. The stock closed that day at 10.11, so it seemed a good deal at the time, but within a month, the stock had hit bottom at 7.52 for a loss of 21%. Ouch!

At point A on the chart, April 17, earnings were released and that helped push the stock lower.

On May 22, point B, the company announced the signing of two contracts worth approximately $1 billion for solar panels to be delivered from 2008 to 2013. Good news! But the stock dropped. To put that in perspective, last year the company had sales of just under $70 million. So far this year, the company has higher revenue, totaling about $45 million in the first two quarters, according to Standard & Poors.

Just as the company was announcing the contract, news began filtering out that Germany would cut the "feed-in" tariff by 8% in 2009 and 2010, and by 9% thereafter instead of the 25% that some were calling for. German lawmakers finalized the cut at C. The subsidy helps solar energy companies by forcing utilities to buy power from them at inflated rates for 20 years.

On June 18, D, the company announced the signing of 2 more contracts worth about $600 million, giving the company a backlog of $1.7 billion. The stock gapped up and closing higher by 18% on the news, forming a third peak two days later. However, on June 27, E, the company announced the offering of $325 million in convertible debt to finance the building of a factory to handle the demand. Shareholders saw additional dilution of their holdings and sold the shares despite the company structuring the deal to minimize such effects (a "capped call" transaction). On July 8, they closed the transaction and sold $378 million worth, including an over allotment.

On July 15, F, the company announced another $1.2 billion contract, bringing the backlog up to nearly $3 billion spread among 5 customers, according to the company website. Two days later, the company announced that quarterly earnings would fall below consensus estimates. The stock gapped down. A day later, July 18, Wedbrush Morgan upgraded the stock from hold to buy.

On July 28, G, the company issued almost 12.2 million shares to cover the cost of redeeming $90 million worth of debt. The stock climbed on the news.

After Germany reduced their solar subsidy, the Spanish government capped its solar subsidy program.

Why isn’t the stock trading at 90 instead of 9? Such a small company needs financing to build the plant and equipment and hire workers. Executing all of that is risky. Concentrated among a few customers and the risk increases. Since the company loves to issue stock, dilution is a growing concern. Imagine what will happen to the stock if one of its major customers decides to stop delivery of the panels it ordered? If German lawmakers decide to cut the subsidy again before 2013, then the stock will take a hit. If other countries in the region also cut subsidies, then that poses additional risk.

The company has been losing money as far back as S&P financials go: 2003. They project another deficit of 20 cents a share this year, worse than what they lost last year. In 2007, the company had revenues of almost $30 million. In the first two quarters of this year, they took in over $45 million. Why can’t the company earn any money? Good question.

Since May, five insiders have sold about 80,000 shares and two in July bought just 6,500.

The complete picture does not look so rosy but as a prospective investor, at least you know the risks. S&P has a strong buy on the stock and a 12 month price target of 16.

-- Thomas Bulkowski

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Tuesday, 8/26/2008. More Bear Market Ahead

Chart of S and P 500 index (^GSPC) on the monthly scale. Pictured is a chart of the S&P 500 index on the monthly scale. Point A marks the end of the bear market in the index and it is the lowest low on the chart. Point B, as luck would have it, is at the highest high. A Fibonacci retrace between those two points I show as three horizontal green lines. In other words, take the difference in price from B to A, and multiply it by 38%, 50%, and 62% and add each of those values to the low at A.

Price at J snagged the top Fib line, the 38% retrace. Why is this important? The lines often act as support or resistance zones. That is why (among other reasons) that the index bounced off the line.

Notice the two red channel lines sloping downward on the chart. The index has bounced between those two lines and it shows no signs of breaking out of that channel, either up or down. While it is possible that price may climb to the top trendline, that is not what I believe will happen. Sure, eventually, the index will touch the top of the channel and stage an upward breakout but first, I expect the index to drop.

The inset shows why. Notice the drop from C to D. The decline is a straight-line affair then the index bounces and makes a new low at G. Now look at the EF move. It is also a straight-line run down. Price at F is bouncing just like it did after G. Thus, I expect the index to drop to H, perhaps making a new low before racing to the top of the channel. That is also why I still have a 1,200 target but do not expect it to get there by September 1, as my August 3 entry suggests.

On the daily scale (not shown), the index appears to be making a pullback to a rising wedge chart pattern. With today’s drop, the pullback may have completed and expect a continued decline in the coming days and weeks, especially since the worst performing month of the year (historically) is just days away. If you own stock long, then have Scotty put up the shields and brace for impact.

-- Thomas Bulkowski

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Monday, 8/25/2008. Book Review and Stuff

Picture of my dog staring at me I’m sitting on my Lay-Z-Boy, watching a DVD, and I look down. What do I see? Answer: A wet nose attached to my dog, and she is staring at me. So I get up, grab my camera and wait for her to return to staring at me.

When the flash goes off, she doesn’t flinch, she just keeps staring at me.

"Do you want to go outside?" No movement. Eddie, the dog on the TV show Fraser, did the same thing to Kelsey Grammer -- sat staring at him.

Maybe she was bored, so I played with her for a few minutes and then returned to my DVD. She resumed staring at me, just like the picture shows.

I went upstairs to my office and tried to coax her inside the air conditioned space (I leave the central air off and just use a window unit to cool my office while the house remains hot). She just sat on the stairs, boiling in the heat, but I knew that if I closed my office door, she would park her fanny against it, which she did.

I grabbed my ruler and slid it under the door, intending to gently poke her. She heard my bones creaking as I knelt down, so she was on her feet and backing away. When the ruler appeared, she started barking as if someone before me had abused her with it. That could be. As a puppy, she was dropped off at a farm in the country and left their to fend for herself. A month or two later, a rescue mom -- or whatever they are called -- took her in and nursed her back to health with the intention of finding her a good home.

Instead, she got me.

I finished a book review of Kathy Lien’s book, Day Trading the Currency Market. I enjoyed it so much that I added it to my favorite books list. Within the pages you will find a well written book that introduces you to the Forex market. She tells you what to look for when trading currency pairs, provides plenty of trading setups, does some analysis on the best times to trade as well the effects of announcements on the pairs. If you trade futures or are new to the Forex market, then I highly recommend this book. Even advanced traders may learn a few pointers especially if you are struggling to make money. As always, any Amazon.com purchase made through this website helps support the site. Just click on the picture of the book and that will take you to Amazon. Then buy everything in sight.

Two people wrote and told me that they also were bitten by the "buy stop" problem I mentioned on Thursday, only this time it was from a stop loss order. Their stocks were sold even though price never traded at the stop price. Their broker may offer a "trade trigger" or similar device, so maybe you can fashion a work-around. If not, then probably sticking to higher volume stocks will help but even those can be thinly traded and vunerable to the problem at times. Mental stops also work (stops held in your head), but you may need to be glued to a TV screen all day.

-- Thomas Bulkowski

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Thursday, 8/21/2008. What You Need to Know Before Placing a Buy Stop.

The chart of Hudson Highland Group (HHGP) on the daily scale

I’ll bet that you think you know everything there is to know about a buy stop. According to Wall Street Words, a book by David L. Scott with a 1997 copyright, the definition of a buy stop order is "A customer’s order to a broker to buy a security if it sells at or above a stipulated stop price." That sounds right, but that is not how it works today. I found out the hard way over a year ago. A had a buy stop on a Nasdaq security in which the price never traded and yet my order filled. According to the above definition, it should never have filled because price did not trade at or above the stop price. Nasdaq does not use the last traded price to trigger stops. They use the asking price. Surprise!

The last time I was bit by this is shown in the above chart. I saw a rounding turn in Hudson Highland (HHGP) and placed a buy order at 10.61, which is a penny above the high on July 17 (about 2 weeks earlier). I show the 17th as point C. The green line shows the price level of the buy stop. I placed the buy order on the evening of July 30, point A.

Earnings were released after the market closed on July 30 and I read them over. I though they were good but sometimes the market differs from my opinion. If the stock gapped up, then I would buy at my stop or at a higher price. That’s ok with me because I wanted to own the stock. If it opened lower, my buy stop would not trigger and that was also fine. If the stock was going down, then I did not want to own it.

The next day, July 31 (B), the stock opened at 8.83. When I looked at the stock quotes several minutes after the open, I saw that the stock was trading around 8.80 and knew that I needed to cancel my buy stop. So, I logged into my broker and discovered that I had purchased the stock. Then I looked at the chart. The stock never came close to trading at my stop level, 10.61, yet I was filled at 10.75 (the high for the day) and again at 10.48. I could not believe it! I could see that the quote said that the high was 10.75, but the chart still showed a price near 8.80, and it never traded near the 10.61 area (at least on my real-time chart).

So, I called my broker, knowing full well what they would say. The stock had a bid-asked spread of over $2 after the first minute and since the bid price was above my stop price, the buy stop executed even though no shares exchanged hands at or above the buy stop price.

I was hopping mad. I day traded the exit, believing that price would only get worse tomorrow and succeeding days, so I sold the stock between 8.89 and 8.92. In short, I lost over 15% of my investment in one minute because of a buy stop that should never have triggered.

I wrote a note to my broker asking for an explanation, saying that if it was a brokerage specific rule then I was going to close my account. This is their reply. "Until approximately a year ago, buy stops for Exchange Listed stocks triggered with a printed trade at or higher than the designated stop price while Nasdaq triggered with the displayed best offer. Then the listed stocks began triggering the stops with the displayed quote so that both were uniform. This is not our choice. This is how all the various market participants treat the orders." I asked another firm the same question and verified that this information is accurate. That is the way the game is played.

I think that’s criminal.

Why? Log in and look at the bid/ask spread after the markets are closed. You will probably see something like $0.01 bid, $999,999 asked. If no offers stand in the way of those quotes, you could sell your stock for a penny or buy it for almost a million a share. If that happens, my guess is you will be almost as mad as me. Almost. But at least you will know how I feel about this f$%^* exchange rule.

-- Thomas Bulkowski

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Wednesday, 8/20/2008. Housing is Toast.

The DJ US home construction index fund (ITB) on the daily scale

The top chart shows the Dow Jones US home construction index fund (ITB) that I discussed back in May. I suggested that price would drop, finding support at the price level of C. Not only did price drop to C, but it kept going as the bottom chart shows.

The lower chart shows an unconfirmed Adam & Adam double top. The pattern will confirm as a true double top when price closes below the lowest valley between the two peaks. I show that as a horizontal red line, starting at A.

What interested me in this chart pattern is the green trendline that slants upward along the price bottoms. Price closed today below that trendline. I consider that a sell signal.

If you look at the individual housing stocks, they do not seem as bearish as the Adam & Adam double top. Yes, they show topping patterns in the form of loose rounding turns, most with peaks where the Adam peaks are.

The DJ US home construction index fund (ITB) on the daily scale

But the decline to the bottom is not a long one. On a percentage basis, though, the drop is probably significant because they are priced so low. Do not go bottom fishing for any of the housing stocks or building industry related stocks, too. I almost fell into that trap recently with a prospective stock pick. When I found out that it supplied materials to the home builders I tossed it out. That was a good move, and I probably saved myself from a loss. The moral of the story is to check your stock picks carefully before you buy.

My guess as to what will happen to price is a continued drop until it approaches the old price level of the July low. It may not make it all the way down, but given enough time it just might and perhaps continue much lower, too. For now, though, look for continued weakness in the housing market.

-- Thomas Bulkowski

 

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Tuesday, 8/19/2008. My Favorite Candlestick Pattern.

The chart of the S and P 500 index (^GSPC) on the daily scale

I show the above picture of the chart pattern indicator as a warning that this could be the start of the downturn that I have been expecting would come since late last month. The signal turned bearish today but it applied to yesterday as shown by the vertical red line. Since I consider this a weekly indicator, it could change back to bullish tomorrow or in the coming days, so do not place too much emphasis on it. However, if you draw a line along the price peaks since early July and one along the valleys, you will see a rising wedge which I show outlines by blue trendlines. I discussed that pattern last Thursday on this blog. Anyway, price can move anywhere it wants, but if I am right, then the stocks I bought during the last few weeks will suffer. How do you protect yourself from a downturn?

A chart of UltraShort QQQ ProShares (QID) on the daily scale. FULL DISCLOSURE: I bought the UltraShort QQQ ProShares (QID) at point A (see chart to the right), so I own this and have a vested interest in seeing the ETF rise. Since the ETF shorts the market, that means I expect the market to drop. If it does, then the gains made in the fund will help offset the losses in my long holdings.

The QID is an exchange traded fund that, according to yahoo!finance, "seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the NASDAQ-100 index."

Today, the ETF shows one of my favorite candlestick patterns, a morning doji star. I show the three-line pattern circled in red, starting on the day I bought the ETF. According to my book, Encyclopedia of Candlestick Charts, the candle is supposed to act as a bullish reversal and it does, 76% of the time in a bull market, ranking it 8th out of 103 candlestick patterns, where 1 is the best performer. However, it is rare, ranking 78th out of 103 where 1 is popular and 103 is almost non-existent. I consider the reversal rate important because direction is more important to me than extent (because I can better gauge how far price will travel, but if I get the direction wrong, I am doomed from the start).

To find the morning doji star, look for three candle lines in a downward price trend. The first day should be a tall black candle followed by a doji whose body gaps below the prior candle’s body. A doji has the opening and closing prices the same or nearly so, making it look like a cross on the chart. The third line is a tall white candle. I show the ideal setup in the inset in the figure.

It takes a median of three days for price to close above the top of the candlestick pattern (staging a breakout) and within 10 days, price averages a rise of 2.10% higher. That performance is less than euphoric. A top performing candlestick would show gains of 5% to 6% over the same 10 days.

Candle patterns taller than the median 4.78% height to breakout price gain 8.18% while short candles have post-breakout rises averaging just 5.1%. If you measure the height of the candle and add that height to the top of the candle, you get a price target. Unfortunately, this "measure rule" works just 49% of the time for this candle pattern. Thus, you might want to multiply the height by 49% before adding it to the breakout price. That will give you a closer target, one that price probably reaches the target about 90% of the time. Morning doji star candles with heavy (above average) breakout day volume show performance that is much better than those with average or below average breakout volume.

Of the three confirmation methods I tested, the opening gap method worked best. Using that scheme, you wait for price to open higher the next day and if it does, that confirms the candle as valid and confirms a bullish buy signal.

If you have been following along in my Encyclopedia of Candlestick Charts book during this discussion, none of this information is new because I took it directly from the book. There is lots of other information about the candlestick pattern, so read the chapter beginning of page 588 for more details.

-- Thomas Bulkowski

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Monday, 8/18/2008. My Favorite Chart Pattern.

A picture of a lizard eating a grasshopper. The picture to the left shows a lizard with a grasshopper in its mouth. I took the picture in my back yard this morning. It’s a wonderful feeling to have nature put on a show if you’re willing to watch.

The chart of the QLogic (QLGC) on the daily scale My favorite chart pattern is a descending triangle which I show between the two red lines on the chart to the right. Price should bounce from line to line, making plenty of crossings and touch each red trendline at least twice. Price breaks out downward 64% of the time, based on a survey of 1,166 triangles in 500 stocks from mid 1991 to mid 1996 (bull market) and 500 from 2000 to 2003 (bear market), but not all stocks covered both ranges.

Many of you familiar with this blog will know that I don’t short stocks. Why then trade a chart pattern that breaks out downward? I don’t trade those either. My preferred setup is as the chart shows. First, I look for a downward breakout. The breakout should not take price down too far, say a maximum of 10% (but that’s an arbitrary number), nor last too long (no more than a few weeks, but that is arbitrary also).

After the downward breakout (which occurs when price closes below the bottom trendline), I look for price to pullback and bust through the top trendline. I show that as step 2. Price must close above the top trendline, not just pierce it. That’s why I show the upward breakout a few days after the first pierce. After the upward breakout, price tends to stage a good run upward, as this example in QLogic (QLGC, daily scale) shows.

In a review of stocks since the start of 2008 showing these types of busted descending triangles, only a handful had lasting upward moves. Several did not clear the top of the chart pattern (which I show in the picture as point A. Thus, you have to be careful regardless of what pattern to choose to trade.

The only book of mine that takes an in-depth look at busted chart patterns is Getting Started in Chart Patterns, shown in the picture. The title is really a misnomer because it covers advanced topics as well as serving as an introduction to chart patterns. An entire chapter dedicated to busted chart patterns begins on page 215. I review 18 different types of busted patterns and provide a few performance statistics for each along the way.

One last note about the chart. The vertical green line connects the apex of the triangle with the sky. When price meets the line, expect the trend to change. It may form a brief minor high or it may take a few days for the trend to change, but that is the way to bet.

-- Thomas Bulkowski

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Thursday, 8/14/2008. Market Weakness Ahead

The chart of the S and P 500 index (^GSPC) on the daily scale

At the start of August, I suggested that the markets would drop, eventually forming a double bottom. The time for the slide is coming. The price of oil jumped by almost $3 today (Wednesday) on news of shrinking supplies in the US. That news forced the market down, too.

Looking at the chart, I show the S&P 500 index on the daily scale. Price has been rising following two converging red trendlines. That pattern is called a rising wedge. The breakout from a rising wedge is downward 69% of the time. The measure rule, which is used to predict a price target, says that price should decline to at least the start of the chart pattern, namely about 1,200. I show my guess as to how price will travel in the coming days. It could take about a month to decline that far but that is also a guess. I do not expect the decline to begin until price closes below the bottom trendline. That may take a few days.

If you are like me, you took advantage of the rising market to buy stocks at a good value. If the market does turn down soon, then you will want to protect those profits. You can buy protective puts on each position assuming they are optionable. You can also buy ETFs that rise when the market declines. I have mentioned the UltraShort ProShares often enough. You can visit yahoo!finance’s ETF center to zero in some issues such as SDS, QID, DXD, DOG and so on. You can effectively short the market by buying long the ETF and you can play sectors, too. It is a handy way to protect your portfolio.

-- Thomas Bulkowski

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Wednesday, 8/13/2008. Airlines Flying Higher. Will it Last?

The chart of AMR corp (AMR) on the daily scale

In late July, I called attention to the transports, specifically, the airline industry. At the time, several stocks were in the process of forming high and tight flags. That occurs when price nearly doubles in less than 2 months and then consolidates before continuing to move higher. The updated chart of AMR shows the flag portion highlighted in red (points B to C). The other stocks, ALK, CAL and a new one, JBLU, all have upward breakouts from high and tight flags (HTF). The kicker about a HTF is that the average rise is 69% in the 253 patterns that I found in a bull market. However, for the measure rule, I look for price to rise about 50%. That provides a comfortable cushion in case the pattern falls short.

In this example, the top of the flagpole (which is the move from A to B) represents the buy signal, and it is at 10.66. A buy stop placed a penny above that would get you in at the right time. And in case you wonder why I no longer recommend buying when price pierces the upper flag trendline, it is because I have found the HTF to be unreliable. Many times price will tumble instead of moving above the top of the highest high after piercing a trending and staging an upward breakout. Thus, it pays to wait for price to clear the flagpole before taking a position (contrary to what I wrote in my book, Encyclopedia of Chart Patterns, 2nd Edition).

AMR reached a high of 13.41 for a gain of 26% so far. That is about halfway to the target of a 50% climb to 16. On the far left of the chart is 16 and that matches a minor high (not shown) which should pose a challenge for the stock to pierce. Look for it to stall there. I am not predicting that the stock will make it to that price level. In fact, I doubt it. Of course, had I known it would climb 25%, I would have bought the stock but I didn’t.

In order for the airlines to continue rising, the price of oil has to continue dropping. That might be possible with the strengthening dollar, falling demand for oil, and a weakening global economy (which is drinking oil). I have been predicting a drop in oil for months now because I felt it was a bubble just waiting to burst. If oil shows strength here, the Dow will tumble and take the airlines down with it. As I write this (Tuesday evening), the two tall tails on the candles at D suggest weakness tomorrow. I would be cautious here if you own the stock.

A search of other completed HTFs shows that they are a mixed bag. The top is often an inverted V-shaped affair with the drop taking price back down quickly. Stillwater Mining (SWC) in January to March 2008 is one example. A trendline beneath the price action would be a good sell indicator. Other examples are CLR in July 2008, but a more sedate turn happened in E-Trade (ETFC) during the January to February period. Price formed a small triple top before moving lower.

Will the run in airline stocks continue? My guess is not for long. They show weakness now with overhead resistance coming. I feel the price of oil has to stage a snap-back rally soon, and that would not be good for the stocks.

-- Thomas Bulkowski

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Tuesday, 8/12/2008. Buy and Hold JNJ.

The chart of Johnson and Johnson on the monthly scale

I almost bought Johnson and Johnson (JNJ) stock today until I saw the measured move up. More about that in a moment. I flipped to the weekly scale this morning as I reviewed the 619 charts I follow because the longer scale can teach you the overall market trend. Beside, you can see trading opportunities like this one.

The chart shows a combination of monthly and daily chart. Let’s take the monthly chart first. I noticed the symmetrical triangle (outlined in red) and then thought of the monthly symmetrical triangle trading setup. A study I conducted on the monthly scale shows that the rewards for investing in such a chart pattern are huge. The actual setup is important, so be sure to read the link for the details.

In the study, I show four possible configurations and this is one of the better setups. The triangle has price rising into the pattern and exiting out the top. The inbound trend is steep (switch to the monthly scale and look from 1994 onward) and price moves up at about 60 degrees. In recent years, the rise has slowed to a more gentle 30 degrees leading to the start of the triangle. I show the trend since mid 1997 as a green line. On this chart, it still looks steep. Steep is good because the trend exiting the triangle often mimics the trend leading to it. Price has closed above the top trendline, indicating a breakout.

On the daily chart, which I show to the right of the vertical magenta line, point A shows the announcement of quarterly earnings. The stock formed a loose congestion pattern for a few weeks before resuming the up trend. As I write this on Monday afternoon, the stock is down a nickel while the Dow is up 73. That suggests weakness. I think the enthusiasm for the earnings announcement is showing signs of wearing off. I expect the stock to retrace its rise back to the congestion area I show circled in blue. If it does that, then I will probably buy the stock. And if you are wondering why I expect the retrace, I view the pattern as a measured move up. From the July low, price moved up, hesitated at the congestion region (called the corrective phase) and then resumed the uphill run. When that run peters out, price often returns to the congestion area before continuing higher. That is the scenario I am looking for.

Does the company show promise? I look at my favorite brokerage reports and S&P has a strong buy on the stock, the best of the signals it issues. They have a $76 price target for the coming 12 months, which I think is a big yawn. Based on the height of the triangle, I show a target of nearly $83. The stock has their highest quality ranking (A+) and relative strength rank is 85 out of 99, where 1 is worst. Earnings so far this year are way ahead of last year’s. They also show volatility as being low, which I like. Sometimes you buy into a stock and it bounces around like a ping-pong ball at an Olympic’s match. I am looking for slow but steady growth. The stock pays a small dividend (2.4% yield), so they pay you to hold the stock. In the past year, the sales growth rate is a modest 14.46%, return on equity is 20.2% and the percentage of long term debt to capitalization is 13.63%. Oddly, they show that net income has declined by 4.32% and net margin is 17.33%, down from the 3 year average of 19.56%.

Ford Equity Research says that "Valuation bands based on the highest and lowest P/E ratio in the last five years applied to the trailing 12 month operating earnings then to the FY1 and FY2 earnings estimates. High band: 21.7 x EPS; Low band: 14.9 x EPS." The stock has bounced off the low band and it probably about half way to the mid point of the channel. In other words, buy when the price is near the lower band and sell when it approaches the top band. It is a buy now, in my opinion.

Ford’s valuation ratios are higher than I like to see, but they are still good. Price to earnings is 16.3, close to the 5 year low-high range of 14.9 to 21.7. Price to cash flow is 15.2 out of 13.2 to 21.5. And so on for price/book value, and price/sales. Those are in the lowest quarter of the high-low range. Price/value is near the middle of the range. They define price/value as "price divided by intrinsic value based on Ford dividend discount model." The company as repurchased 2.6% of shares outstanding during the last 12 months, which I consider a plus providing they do not add on debt to do so.

Ford rates the stock a buy, one notch below their top rating. They also say that "Long and short term historical price performance indicates neutral performance for the next 3 months." So do not expect this stock to double overnight. "JNJ’s operating earnings yield of 6.2% ranks above 62% of the other companies in the Ford universe of stocks, indicating that it is undervalued." Insider transactions favor selling over buying, so that is not good news, but S&P ranks the activity as neutral.

After buying the stock, I will place a stop at 67.64, which is just below the prior minor low on July 30 and also outside the 68.25 volatility stop level, based on the current price of 71.55. Those numbers may change if price drops as I expect in the coming days/week. And I forgot to mention that the volume trend is rising during development of the triangle, and my research shows that with monthly symmetrical triangles, that setup helps performance (140% average gain in 45 samples before price drops at least 20%).

-- Thomas Bulkowski

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Monday, 8/11/2008. Gold is Tarnished.

The chart of gold ETF (GLD) on the daily scale

I found an error in the transactions of the Industry relative strength portfolio which has now been fixed. It was closing out some trades prematurely. I also added a wash sale rule to both test portfolios. That means a buy signal is ignored if it occurs within 31 days of a losing trade in the same stock.

Spent all day Saturday draining my hot water heater (you’re supposed to do it yearly to flush out the gunk that collects), changed the radiator fluid and oil from my car, and replaced the valve cover gasket on it. I also spent too much of my time riding around town looking for a torque wrench that would handle the 60 inch pounds of force needed to tighten the screws. Most wrenches handled much more force than that but the range did not extend down to the small stuff. As of this morning, I found no leaks. Yippee!

The above chart of the streetTRACKS Gold Shares (GLD -- an exchange traded fund) comes from the June 3 blog entry. That was over two months ago. The following chart shows how my guess has played out. The head-and-shoulders bottom (LS for left shoulder, Head, and RS for right shoulder) confirmed as a valid chart pattern, but not quite how I expected.

The below chart shows a magenta vertical line in June that illustrates where the top chart ends and the more recent price data begins. Price formed a second, smaller, head-and-shoulders bottom (E, RS, and F) before moving up as I predicted. GLD did not climb quite as far as I expected. Looking at the top chart, it peaked in the red squiggles before turning down.

The chart of gold ETF (GLD) on the daily scale

For a while, it looked like it might form a cup with handle chart pattern, but price continued dropping. I show my new guess as to where gold is headed in green. In other words, I expect GLD to drop to the price level of the symmetrical triangle’s apex at C and find support there. Notice how the apex of the triangle nearly matches the turning point at D on the time scale. Price turns at a triangle apex 60% of the time.

It is still possible that GLD will move higher if support at the bottom of the rounded-looking turn holds. The gap down on Friday may be an exhaustion gap. If that is the case, look for GLD to rebound and probably stall at a down-sloping trendline drawn connecting peaks A and B.

-- Thomas Bulkowski

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Thursday, 8/7/2008. The Case for Integrated Petroleum

As I mentioned yesterday, I was going to review a stock (Tesoro Petroleum), but decided to give you a market update instead. Wish I hadn’t. I would have looked brilliant because the stocks in the industry climbed between 7% and 12% today (Wednesday).

Before I delve into Tesoro, let me mention the profit potential for all candidates, based on Wednesday’s close.

StockCloseTarget% Gain
Frontier Oil: FTO21.232518%
Holly Corp: HOC31.413924%
Tesoro Corp: TSO17.392332%
Valero Energy: VLO34.474428%

I will give you a snapshot review of the stocks in this list at the end of this blog entry.

Three of the four stocks show a quick downturn starting in early to mid June then a consolidation, which in Frontier Oil’s case looks like a diamond bottom. These swift drops tend to be followed by recoveries, sometimes just as fast. The target is the price where overhead resistance begins, so that would be my first guess as to how far up the stocks might rise. Tesoro is the only one in the group that did not suffer a quick decline during June -- it has just dropped steadily since late October. When I looked at this stock, I figured it must be due for a bounce or even a reversal. The overhead resistance area is less well defined in Tesoro than the other three.

The drop in the stocks was due to the inability of the refiners to quickly pass along their rising costs as the price of oil spiked. With the price of oil coming down, the feedstock is getting cheaper, so margins are recovering. That is the idea behind the stocks reversing trend now. I am sure you all know how quickly the price of gas at the pump goes up but it seems to take forever for it to come down. That latency benefits the refiners like Tesoro, which owns 449 gas stations (and ships to another 462 "jobber/dealer" stations) as well as owns a number of refineries. According to Standard & Poors, "Tesoro Corp. is one of the largest independent refiners and marketers of petroleum products in the U.S." As of August 2, S&P rated the stock a hold saying that "We believe the company has strong asset quality and solid liquidity," giving it a low risk assessment but notes that relative strength is weak (8 out of 99 where 1 is weakest). I rank the industry as 45 out of 49, where 1 is best. They have a $22 price target in the coming 12 months, which is quite close to my 23 target.

Ford Equity Research also rates the stock a hold based on a report dated of August 1. They write "Long and short term historical price performance indicates above average performance for the next 3 months." Since earnings were in a deficit, they show the historical price to sales ratio over the past 5 years and note that the stock is trading at the low end (0.06 x trailing sales) of that channel. The assumption is that the stock will recover to the high end (0.47 x trailing sales) if you hold it long enough.

In another report by Ford, they show "Monthly per share intrinsic value of company as determined by Ford’s dividend Discount Model." The two lines diverge, suggesting the stock will also recover to normality. Their valuation ratios confirm this view with price/cash flow, price/book value, price/sales, and price/value (whatever that is) either at or very near the low end of the 5 year band. In other words, the stock should recover to normal values if you give it enough time. Since earnings are currently in deficit, it is not strictly a value play, but more like a turn around situation, I think. Options are available, so if you want to buy the stock, you can also buy a protective put to help guard against a drop.

Insider trading, according to Vickers, is nothing to write home about. Some small buying (less than 1,000 shares each among 8 insiders), and some larger selling (thousands of shares). S&P says that insider activity is favorable, but I don’t see it.

The company announced earnings in the last day or two and I listened to it. The analysts calling in seemed to be concerned about a large loss ($81 million, if memory serves) from hedging activities that were curtailed in May. The company will still hedge, but not to the extent that they did in the past. That is a good thing since they suck at it, to put it bluntly. I may have the number wrong, so you can listen to the earnings call yourself.

A chart of the Tesoro Corp (TSO) on the daily scale.

The chart shows a two-day rise in the stock of 16.5%. That suggests the stock will take a breather and settle back before resuming the climb. Thus, be cautious about buying the stock tomorrow. I would wait for a retrace.

The stock shows an Adam & Eve double bottom. The Adam bottom is at A and Eve is at B. Notice how the two look different. Adam is narrow, V-shaped, but Eve is wider (obese, you might say). The double bottom confirms as a valid pattern when price closes above the peak between the two bottoms, namely C, shown by the green line.

I circled potential overhead resistance and also show my 23 target price. The other three stocks do not have this visible overhead resistance until they reach their targets, since the drop was a straight-line affair. You may want to examine those stocks and evaluate their potential.

Volume has been trending upward in TSO, and I view that as the smart money buying in quietly. But for every share sold there is a buyer, so all you can say is that more shares have changed hands. I did not look at the accumulation/distribution indicators or other stuff.

Before you get too excited about Tesoro, flip to the weekly chart. You will see that price is at a support level here. If it does not hold, it can tumble to 11 and freefall to 4. Since the high was near 66 in October 2007, it could climb back that far but it will not happen overnight. You may consider this a buy and hold through 2009, but keep an eye on it. If price drops below the recent low, then sell it. And as I mentioned, I would wait for a pullback before buying the stock.

Here is a snapshot review of each company.

-- Thomas Bulkowski

Symbol Chart Pattern Start End
TSOPipe bottom05/05/200805/12/2008
FTODiamond bottom07/14/200808/05/2008
HOCPipe bottom03/17/200803/24/2008
VLOPipe bottom05/05/200805/12/2008

 

Definitions
RS is relative strength (where 1 is best). For others, see the glossary.
’Breakout is upward/downward 100% of the time’ means price breaks out up/down by definition, not by statistically measuring the rate.
All numbers assume a bull market and are based on the breakout direction that occurs most often.
For more information, consult my book, Encyclopedia of Chart Patterns, Second Edition.
 
Tesoro Corporation (TSO)
Industry: Petroleum (Integrated)
Industry RS rank: 41 out of 46
Stock RS rank: 557 out of 561
Latest close as of 08/06/2008: $17.39
1 Month average volatility: $1.32. Volatility based stop (assuming an upward breakout): $12.96 or 25.5% below the close.
Change year to date: -63.54%
Volume: 13,591,900 shares
3 month average volume: 10,118,826 shares
 
Chart pattern: Pipe bottom reversal pattern from 05/05/2008 to 05/12/2008
Performance rank: 2 out of 23.
Breakout is upward 100% of the time.
Average rise: 45%.
Break-even failure rate: 5%.
Throwbacks occur 44% of the time.
Price meets the measure rule target 83% of the time.
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Frontier Oil Corporation (FTO)
Industry: Petroleum (Integrated)
Industry RS rank: 41 out of 46
Stock RS rank: 544 out of 561
Latest close as of 08/05/2008: $19.01
1 Month average volatility: $1.25. Volatility based stop (assuming an upward breakout): $14.97 or 21.2% below the close.
Change year to date: -53.15%
Volume: 5,100,600 shares
3 month average volume: 4,201,325 shares
 
Chart pattern: Diamond bottom reversal pattern from 07/14/2008 to 08/05/2008
Performance rank: 8 out of 23.
Breakout is upward 69% of the time.
Average rise: 36%.
Break-even failure rate: 4%.
Throwbacks occur 53% of the time.
Price meets the measure rule target 81% of the time.
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Holly Corporation (HOC)
Industry: Petroleum (Integrated)
Industry RS rank: 41 out of 46
Stock RS rank: 526 out of 561
Latest close as of 08/05/2008: $28.47
1 Month average volatility: $2.06. Volatility based stop (assuming an upward breakout): $23.45 or 17.6% below the close.
Change year to date: -44.06%
Volume: 1,269,300 shares
3 month average volume: 1,321,222 shares
Warning: the quarterly earnings announcement is due within the next 3 weeks (but verify to be sure), so consider avoiding a trade.
 
Chart pattern: Pipe bottom reversal pattern from 03/17/2008 to 03/24/2008
Performance rank: 2 out of 23.
Breakout is upward 100% of the time.
Average rise: 45%.
Break-even failure rate: 5%.
Throwbacks occur 44% of the time.
Price meets the measure rule target 83% of the time.
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Valero Energy (VLO)
Industry: Petroleum (Integrated)
Industry RS rank: 41 out of 46
Stock RS rank: 542 out of 561
Latest close as of 08/05/2008: $32.14
1 Month average volatility: $1.99. Volatility based stop (assuming an upward breakout): $26.77 or 16.7% below the close.
Change year to date: -54.11%
Volume: 15,549,400 shares
3 month average volume: 12,546,085 shares
 
Chart pattern: Pipe bottom reversal pattern from 05/05/2008 to 05/12/2008
Performance rank: 2 out of 23.
Breakout is upward 100% of the time.
Average rise: 45%.
Break-even failure rate: 5%.
Throwbacks occur 44% of the time.
Price meets the measure rule target 83% of the time.
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Wednesday, 8/6/2008. Has the Market Turned Bullish? Not So Fast.

A chart of the Dow Industrials (^DJI) on the daily scale.

I was going to discuss another stock pick, in depth, but with the indices rising dramatically today, I changed my mind. The chart shows the Dow industrials (^DJI) on the daily scale. Having just posted on Monday my targets for a lower market, I am wondering if I made a mistake? Let’s take a closer look.

The Dow formed an Eve & Eve double top at C and D. Adam and Eve refer to the shape of the two peaks. Adam peaks are narrow spikes while Eve is more rounded looking. Eve can have spikes but they are often more numerous and stubby affairs. Adam spikes look like thin needles. In this example, both peaks have single spikes but below that is a wide looking, rounded turn. Whether you call it Adam & Adam or Eve & Eve is irrelevant. There is a slight performance difference between the two, but not enough that you can spot it without putting on your reading glasses.

The average tumbled after the top formed and moved into bearish territory by dropping more than 20% below the October 2007 peak. From the high of 14,198, it hit bottom at 10,827, a decline of 23.7%. Please note that I measured the drop from highest peak to lowest valley, not close to close.

Anyway, the bear market will not complete until the average rises by 20% off the low. That means it must reach of high of about 12,992, or about 1,400 points above today’s close. You need not wait for a confirmed bull market to buy stocks that move up. Indeed, bottom fishing can pay off handsomely. Despite my predicting lower trends ahead, I have been adding distressed issues to my portfolio over the last two weeks. That bothers me. Question: If I think the market is going lower, why buy now? Answer: because I could be wrong.

Even as I formulated my price targets this weekend for the various indices, I kept thinking that the Dow could be forming an ugly double bottom. That is a chart pattern in which the second bottom is more than 5% above the bottom of the first one. In a regular double bottom, the two bottoms are supposed to be close in price. An ugly one looks like the two bottoms A and B shown in the chart. The 5% minimum is an arbitrary setting, found through testing, so I rarely compute it. If the two bottoms are uneven (appearing well apart in price), that’s fine with me.

In this example, the ugly double bottom does not confirm until the average closes above the high between the two bottoms. I show that as a horizontal red line. I also drew in three Fibonacci retrace lines of the D to A drop. Notice that the average has already pierced the 38% resistance level (and that is why those lines are so important: they often act as overhead resistance). If tomorrow or in the coming days the average closes above the red line, confirming the ugly double bottom, then I will be overjoyed. The stocks I bought these past two weeks will have a better chance of a longer life which suits me just fine. They are supposed to be long-term holdings anyway.

Until confirmation happens, I am cautiously optimistic. When the average jumps by hundreds of points, it tends to retrace some of that in the coming days. More trouble in the oil patch could spell the end of this up-swing as well as Iran kicking up a fuss, or a terrorist attack in China during the Olympics. Anything can happen but the FED standing still today certainly helped. I don’t have all of the answers, but I will be pleased if I am wrong this time and the major indices move up instead of down.

-- Thomas Bulkowski

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Tuesday, 8/5/2008. Down with Biotechnology! Find out Why.

I made a change to the industry relative strength portfolio. I noticed that when a trade ended, sometimes the same stock was bought the next day. To eliminate this, I limited the buy strength to the top rating of 1 instead of 3 (a setting of 2 did not cure the problem). The change also boosted the portfolio performance to 18.5% for the year while cutting the maximum potential loss to a large 29.7% from an even larger 30.2%. The number of trades has also been cut dramatically, which I view as a plus. I do not like feeding my broker any more than I have to.

I also tweaked the RSI portfolio because I felt it was buying too often. I moved the buy threshold from 20 down to 19. That boosted performance while cutting the maximum potential loss -- a win-win situation. It also removed a few trades, too.

A chart of the iShares Nasdaq biotechnology ETF (IBB) on the weekly scale.

The chart shows the iShares Nasdaq biotechnology exchange traded fund (IBB) on the weekly scale. It is a cautionary tale. According to yahoo!finance, the fund, "seeks investment results that correspond generally to the price and yield performance of the Nasdaq Biotechnology index." I picked this fund out of the many I look at because of the strong recent performance.

Price since June has shot up in a straight-line run, perhaps fueled by takeover rumors of Barr Pharmaceuticals, Genentech, and Imclone Systems. By that list, you might think that every stock in the industry was undervalued and ripe for takeover. Some stocks are suffering but many others are nearing or at new highs. The industry is ranked 3 out of 49 for performance over the past 6 months, where a rank of 1 is best.

There are a few things that bother me about the chart. First, price at B has reached the level of the old high, A. That area is a major resistance zone and when the market is weak, the stock tends to reverse itself there, forming what is called a 2-B top. If price drops far enough, it may form a double top if it closes below the low between the two peaks.

Second, notice the straight-line run up to peak A. That is similar to the B rise, isn’t it? After peaking at A, price dropped in a quick inverted V type pattern. The decline after B could follow a similar trajectory. I would draw a trendline beneath the rise up to B. If price closes below this line, then consider selling a long holding. Circled in blue is a congestion area that I think will support the ETF should it decide to drop.

-- Thomas Bulkowski

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Monday, 8/4/2008. Smoke and Market Outlook for August.

A chart of the Nasdaq composite (^IXIC) on the daily scale.

As I write this on Sunday afternoon, my wonderful neighbor is cooking some type of road kill on their smoker/grill. Since I rarely use my air conditioning, I have my windows open. The smoke from his cooker drifted into my house and since my office sits on the opposite side of my house, the smoke had to drift all the way through it before I smelled it. I closed my windows in short order, but it still smelled like someone burnt a pair of smelly socks in my living room.

Other than that, it was an uneventful weekend. Spent Saturday making sure my data was not "dirty" (bad quotes, unsplit stocks, truncated duration, that kind of thing) and then I conducted multiple runs to give color to my recent study on price behavior. I will update the page when I complete the research. And thanks to Thomas Krawinkel for sharing his ideas about my numbers.

The chart above is another look at the Nasdaq composite (^IXIC) on the daily scale. If you click on the highlighted link for the associated index/average under Tom’s Targets at page top, you will see a popup window display something like this: "As of July 19, I see the composite forming a third bottom at 2,160, so I am staying with that target." That was posted for the Nasdaq chart four trading days after the July low. The above chart shows what I now think will happen.

When I see this picture, I think it aches to form a mirror of the left side. By that I mean the move from C to D was so gentle and the move from D upward into August seems to mirror the move from C to A. I expect a second low to appear at B, mirroring the drop at A. I do not expect the move up from D to B to carry as far nor the drop to B to make it all the way back to the level of A. Thus, my price target for the Nasdaq is a high of 2,400 and a low of 2,225. And based on my drawing, that may take longer than August before the new bottom occurs. Remember, September is the worst performing month of the year, so I will set a date target of mid September.

As for the other market indices, here is a review of what I said and what I now think.

Dow utilities: I wrote, "As of 7/22, the average made it up to 504 and not the 510 I was looking for. I now expect the decline to reach 475." Price on Friday dropped through my target of 475 to reach a low of 469.50. That is a bulls eye guess on my part. What’s next? Right now that is hard to say because price made such a huge drop Friday. But the average is now resting on a support zone. If it holds, you could see the average recover to 500. If it does not hold, the drop in the coming 6 months could take it all the way down to 380 to 400. Ouch. My guess is that the average may bounce upward in the next few days but resume the drop through support and bottom at 425 then pull back to the base of the head-and-shoulders top (weekly scale). That should take it back up to 470 by mid September when the fun really begins.

Dow Transports: "As of July 19, I see the index finishing its pullback to the May congestion region and then tumbling back down to 4,650." The average did reach the May congestion area but then moved sideways for the next week or two. It made a low of 4,883, well above of the 4,650 target. The tranys have been strong for most of the year, beating the performance of the other market indices. I see the transports completing the throwback to the Eve & Adam double bottom that formed in July. That should take it down to 4,825 before rebounding and moving up to 5,300 by September 15. It is possible we have seen the low and the transports just coast higher from here...

Dow Industrials: "As of July 19, I see the index climbing to 11,650 and then rounding down, forming a double bottom at about 10,900." The index hit my target on the way up and climbed to 11,698 before dropping to a low of 11,125. I am going to stick to my 10,900 target, where it forms a double bottom. I think it could do that this month, so my date target is September 1.

S&P 500: "As of July 19, I see the index peaking and then rounding down to form a double bottom at 1,200." The index reached a high of 1291 before dropping down to a low of 1234.37, close to my 1,200 target. It closed Friday at 1,260, so I think I will stick to the 1,200 target for a double bottom by September 1. The index has hit a 38% retrace of the move down from May. Maybe this will make a Big W type bottom before moving up. Alternatively, this could be the start of an ugly double bottom, which is bullish.

Both the Dow industrials and the S&P look similar. I get the feeling that the two could jump higher and not form the double bottom at all. That is a possibility which I used last week to add two stocks to my portfolio. Based on the above analysis, buying may have been premature. But we won’t know that for a few weeks yet. And remember that September and October are coming. Both months have not been kind to investors.

-- Thomas Bulkowski

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