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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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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 07/20/2017
21,612 -28.97 -0.1%
9,483 -92.64 -1.0%
720 5.10 0.7%
6,390 4.96 0.1%
2,473 -0.38 0.0%
YTD
9.4%
4.9%
9.1%
18.7%
10.5%
Tom's Targets    Overview: 07/14/2017
21,850 or 21,000 by 08/01/2017
9,950 or 9,400 by 08/01/2017
725 or 685 by 08/01/2017
6,450 or 6,175 by 08/01/2017
2,525 or 2,400 by 08/01/2017

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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Monday, 6/30/2008. Market Review.

The chart of the Dow Jones (^DJI) on the weekly scale.

First, let me say that I am working on RSS feeds now. I hope to have it ready soon and will let you know when it is available. RSS is a way of having information pushed to you instead of forcing you to visit websites and hunt for changes. The feed will highlight updates to the blog, what’s new page, chart pattern indicator, and model portfolios.

Second, the chart shows the Dow Jones industrials on the weekly scale. If you take the difference between the high to the left of A (October 11) and the low at B, you will get a decline of 20.43%. If you use the closing prices, then the Dow has dropped 19.89% from its highest close on October 9, 2007, slightly below the 20% threshold that many would call a bear market.

Using the highest high to current low, we find the following:

Dow utilities: -9.06%
Dow transports: -12.4%
S&P 500 index: -19.29%
Nasdaq composite: -19.95%
Dow industrials: -20.43%

The utility average is doing the best, followed by the transports. Tech stocks and the broader market are about tied, all three are near bear territory.

Year to date, the picture is brighter.

Dow transports: +7.4%
Dow utilities: -4.8%
Nasdaq composite: -12.7%
S&P 500 index: -12.9%
Dow industrials: -14.5%

The transports are still in positive territory, but the others have declined. The 30 stock Dow industrials are performing the worst among the bunch. It is a good time to remain in cash or to trade the bear side by buying ETFs that specialize in shorting the market. I am not recommending any of the following for purchase, but if you want to buy something that is moving up, then consider these.

-- Thomas Bulkowski

Symbol Chart Pattern Start End
DOGPipe top08/06/200708/13/2007
DXDDouble Bottom, Eve and Eve02/01/200802/27/2008
PSQBroadening bottom11/28/200612/19/2006
QIDTriangle, symmetrical01/23/200802/25/2008
SHHead-and-shoulders complex top07/27/200709/10/2007
SDSPipe bottom01/28/200802/04/2008

 

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.
 
DJIA short 1x ProShares (DOG)
Industry: Investment Co. (Domestic)
Industry RS rank is unavailable.
Latest close as of 06/27/2008: $67.95
1 Month average volatility: $0.88. Volatility based stop (assuming a downward breakout): $70.23 or 3.4% above the close.
Change year to date: 14.49%
Volume: 383,900 shares
3 month average volume: 244,751 shares
 
Chart pattern: Pipe top reversal pattern from 08/06/2007 to 08/13/2007
Performance rank: 4 out of 21.
Breakout is downward 100% of the time.
Average decline: 20%.
Break-even failure rate: 11%.
Pullbacks occur 41% of the time.
Price meets the measure rule target 70% of the time.
Top
DJIA short 2x ProShares (DXD)
Industry: Investment Co. (Domestic)
Industry RS rank is unavailable.
Latest close as of 06/27/2008: $64.55
1 Month average volatility: $1.57. Volatility based stop (assuming an upward breakout): $60.05 or 7.0% below the close.
Change year to date: 28.64%
Volume: 14,814,100 shares
3 month average volume: 3,579,166 shares
 
Chart pattern: Double Bottom, Eve and Eve reversal pattern from 02/01/2008 to 02/27/2008
Performance rank: 6 out of 23.
Breakout is upward 100% of the time.
Average rise: 40%.
Break-even failure rate: 4%.
Throwbacks occur 55% of the time.
Price meets the measure rule target 67% of the time.
Top
Nasdaq 100 short 1x ProShares (PSQ)
Industry: Investment Co. (Domestic)
Industry RS rank is unavailable.
Latest close as of 06/27/2008: $58.45
1 Month average volatility: $1.04. Volatility based stop (assuming an upward breakout): $56.04 or 4.1% below the close.
Change year to date: 9.85%
Volume: 152,300 shares
3 month average volume: 112,949 shares
 
Chart pattern: Broadening bottom reversal pattern from 11/28/2006 to 12/19/2006
Performance rank: 17 out of 23.
Breakout is upward 53% of the time.
Average rise: 27%.
Break-even failure rate: 10%.
Throwbacks occur 41% of the time.
Price meets the measure rule target 59% of the time.
Top
Nasdaq 100 short 2x ProShares (QID)
Industry: Investment Co. (Domestic)
Industry RS rank is unavailable.
Latest close as of 06/27/2008: $43.86
1 Month average volatility: $1.60. Volatility based stop (assuming an upward breakout): $40.41 or 7.9% below the close.
Change year to date: 15.48%
Volume: 50,732,800 shares
3 month average volume: 32,188,048 shares
 
Chart pattern: Triangle, symmetrical continuation pattern from 01/23/2008 to 02/25/2008
Performance rank: 16 out of 23.
Breakout is upward 54% of the time.
Average rise: 31%.
Break-even failure rate: 9%.
Throwbacks occur 37% of the time.
Price meets the measure rule target 66% of the time.
Top
S and P short 1x ProShares (SH)
Industry: Investment Co. (Domestic)
Industry RS rank is unavailable.
Latest close as of 06/27/2008: $68.51
1 Month average volatility: $0.90. Volatility based stop (assuming a downward breakout): $70.74 or 3.3% above the close.
Change year to date: 12.74%
Volume: 550,300 shares
3 month average volume: 245,268 shares
 
Chart pattern: Head-and-shoulders complex top reversal pattern from 07/27/2007 to 09/10/2007
Performance rank: 3 out of 21.
Breakout is downward 100% of the time.
Average decline: 23%.
Break-even failure rate: 4%.
Pullbacks occur 67% of the time.
Price meets the measure rule target 53% of the time.
Top
S and P short 2x ProShares (SDS)
Industry: Investment Co. (Domestic)
Industry RS rank is unavailable.
Latest close as of 06/27/2008: $67.02
1 Month average volatility: $1.69. Volatility based stop (assuming an upward breakout): $62.55 or 6.7% below the close.
Change year to date: 23.70%
Volume: 31,324,700 shares
3 month average volume: 19,384,902 shares
 
Chart pattern: Pipe bottom reversal pattern from 01/28/2008 to 02/04/2008
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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Thursday, 6/26/2008. Nasdaq storms.

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

I usually write these blog entries the day before they are due, but I was running behind yesterday. I am posting this on Thursday before the market opens.

Yesterday, after watering my grass for an hour in the morning, a storm blew through and dropped 2 inches of rain "in a short time," according to new reports.

Hail the size of quarters scoured the paint off my chimney but did not dent the new Hummer my neighbor bought and has parked in his driveway, nor dented his sports car. His garage houses something more important: a pool table and parties on the weekend.

Two toads survived the hail and pushed their way through the water to sit on my lit porch and hunt for bugs. What I find surprising about this storm is that small branches and debris litter the ground like leaves in autumn. I fear sliding on that stuff during my bike ride later this morning. Falling on a bicycle is no fun when you’re moving at over 30 miles per hour (peak, not sustained. I do 15 miles at between 15 and 17.5 mph. That’s not bad for someone in his 50s and if you think it’s slow, then you try it and be sure to throw in some hills and a stiff head wind).

The top chart displays my blog entry from June 11. It shows an unconfirmed double top chart pattern (peaks A and B). When confirmed (meaning price closes below the valley between the two peaks, point 2) it suggests price will continue down.

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

This is an updated chart showing the Nasdaq composite on the daily scale and it is zoomed in slightly. As you can see, price closed below the green confirmation line, confirming the Eve & Eve double top as a valid chart pattern. Price has continued down since then, but not in a straight-line run. It pulled back first before heading lower.

What interests me about this picture is the most recent candle, highlighted in the box. It shows a tall upper shadow that rests atop the candle’s body.

The upper shadow is the thin line and the body is the rectangle below the line. Candle traders will probably tell you a tall upper shadow is bearish, especially when found at the top of a climb. I think this one is bearish because I saw tall tails on the other securities I looked at last night.

Futures are down and that predicts weakness in the stock markets at the open, so I believe that the Nasdaq is going to continue lower today. Whether it stops within the support zone of the upper chart we can only wait and see.

-- Thomas Bulkowski

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Wednesday, 6/25/2008. NGA: Strong building materials sector.

The chart of North American Galvanizing and Coatings (NGA) on the daily scale.

The chart of North American Galvanizing and Coatings (NGA) appears on the daily scale. I show this for a reason: the straight-line move up since the breakout. Let me explain. Formed between the two red lines is a descending triangle. Most of the time (64%), price breaks out downward but not in this case. Price gapped higher at A and threw back to the triangle, bottoming at B. Throwbacks occur 37% of the time in descending triangles and that number is probably higher now that the markets are so volatile.

What makes this stock special, is that it is part of the building materials industry. That sector is supposed to be hurting. And I am not talking about every home in the midwest floating down the Mississippi river and needing to be rebuilt. This stock and others took off well before the rains came (some as early as March). The industry is ranked 10 out of 48 for industry relative strength, where 1 is best.

Other stocks in the industry are also shooting higher. They include: APOG (is retracing its gains now), FRD, IIIN, LXU, MEA, NCS, NWPX, TWP (is also retracing), but others in the industry are hurting: AWI, GFF, MAS, and USG. What dawned on me as I looked at these stocks is that chart patterns are just buy and sell signals. What happens between buying and selling is what makes a trade. I got lucky with HHGP and caught the uptrend near the start and sold a few weeks before the end. How can you tell if a lasting trend is about to start? I have no idea. If you can find an answer to that, then the market’s riches are yours.

-- Thomas Bulkowski

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Tuesday, 6/24/2008. No surprise: Higher Oil ahead.

The chart of the ETF DJ US oil equipment and services (IEZ) on the daily scale.

About the only thing safe to call a long-side (as opposed to a short sale) investment in this market is something related to oil. I found this gem when prospecting the charts. It is an exchange traded fund that "seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Oil Equipment & Services index" according to yahoo!Finance.

The chart shows that price has broken out upward from an ascending triangle. That suggests the uptrend will continue but you never know in this market. This is a thinly traded ETF -- just 41,500 shares traded hands yesterday (June 23), so you big spenders might consider looking elsewhere for a similar situation in another ETF.

Based on the height of the triangle, using the measure rule, the upward target price is 84.43, based on the full height. For a more accurate and closer target, you can compute the height and multiply it by 75% because that is how often price reaches the full height measure. That would give a new target of 82.94, call it 83. Since the ETF started trading in 2006, it is at an all-time high, so there is no overhead resistance except for round numbers (80, 85, 90 and so on).

I do not like ascending triangles because they tend to fail too often. Descending triangles with upward breakouts work better, especially if the breakout is first downward (a busted pattern where the downward breakout reverses and breaks out upward). If price reverses on this chart pattern, then a volatility stop placed at 73.04 would work to keep you from being stopped out on normal price fluctuation, according to my computer.

You can also place a stop below the bottom chart pattern trendline, about 75.43. That would be much closer to the current action, or about 6.4% away. You risk being stopped out on normal volatility but price is supposed to move up anyway.

-- Thomas Bulkowski

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Monday, 6/23/2008. Dow at support?

The chart of the Dow Jones industrial average on the weekly scale.

The chart shows the Dow Jones industrial average on the weekly scale. I drew a red trendline connecting the valleys since late 2004, just to see if the current price action lines up. It does. This suggests that the Dow has reached a support line and it should turn up.

Price is currently at B. This lines up with peak A in 2006. But below that is a support area I show with a green line. It connects a peak in March 2006 and another minor one in July. I do not place much faith in this line because I think it will not support the Dow, should the average tumble instead of rise.

I drew another support line in blue that connects, or comes close to, several peaks and maybe a few valleys. I think this is a more potent support zone. If the Dow were to drop, my guess is it will turn when it reaches this line (zone, really).

What do I think will happen? My hope is that the Dow will turn up, perhaps following the path from B to C. The top of this range will form a double top, so it is a natural resistance area. The bottom of the BC trend rides along the red trendline, mirroring the March valley to the left of the magenta vertical line.

If the Dow continues to drop, piercing the support zone setup by the red trendline, then it could follow path D. This path approaches the July 2006 low, the origin of the straight-line move up to the peak in February 2007. Since price, on the way down, often does not fully retrace to the launch price after a straight-line run up, I think the average will probably bottom out at the blue support line, at D, and not at the July 2006 valley.

Either path C or D is possible, and it is too early to say which is more likely.

-- Thomas Bulkowski

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Friday, 6/20/2008. The high and tight flag to Avoid!

The chart of the U.S. Concrete (RMIX) on the daily scale

For the record, I canceled the buy order on CEM. The stock was down when half of the others in the industry were higher. I do not like the way this one is shaping up.

The chart shows a high and tight flag in U.S. Concrete (RMIX) on the daily scale. Price bottomed in April at 3.05 and climbed in a straight-line run to a high of 6.25, more than doubling in just over a month. During the last two weeks, price has formed the flag of the HTF. The flag portion that sits atop the flag pole need not bee a flag or any other recognizable pattern. This one looks loose, and that is not good (tight flags perform better). Besides that, what is wrong with this chart pattern?

The answer is nothing. Why then do I say to avoid this one? Because if you look at the other stocks in the industry, you would find an alarming trend. Cemex SA (CX) has dropped 26%, CRH plc (CRH) has plunged 27%, Eagle Materials is down 23%, Martin Marietta Materials is down 13%, Texas Industries is off 18% and Vulcan Materials is down 23%. In other words, the stocks in the industry are acting like skydivers without parachutes. Why would you think that this stock has an antigravity device? I am sure there is a reason but I do not have to dig for it. If the industry is going down, then I do not want to buy a stock, regardless of how well it is doing. There are other stocks with more promising setups than to risk one in which you are swimming against the current from the start.

You can also look at this pattern as a measured move up. That pattern is formed by the ABCD turns. The AB leg is supposed to equal the move of the CD leg. When the pattern completes, as this one has, price often returns to the corrective phase, BC. That would mean a decline in the stock.

If you want to throw the dice and trade this stock anyway, then wait for price to rise above the top of the pattern. Place a buy stop at 6.26 (a penny above the June 13 high). In too many cases, buying before that time and you risk a failed trade. Price will pause at 7, 8, and 9. Those are three areas of overhead resistance. On the weekly scale, price is sitting on overhead resistance right now, suggesting price will not move higher because of it and the weak industry.

Aftermath

It is now over a year later and the stock never confirmed the high and tight flag. In fact, price was a skydiver, cratering at about 1.50 in March 2009, following the trend of the rest of the market.

-- Thomas Bulkowski

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Wednesday, 6/18/2008. Cup in Chemtura Corp (CEM)

The chart of the Chemtura Corp (CEM) on the daily scale

Full disclosure: This is a stock from my watch list and one that I tried to buy as recently as June 4. I do not own it as of this posting, but have a buy order in place on the stock.

Let’s take a closer look. The chart shows a cup with handle pattern. According to William O’Neil who popularized the pattern, price should trend upward leading to the left cup lip by at least 30%, followed by a rounded decline into the bottom of the cup of 12% to 33% or more, and another rise to the left cup lip. Then a handle should appear. He says that the handle usually lasts one to two weeks. The guidelines he recommends take up half a page in my Encyclopedia of Chart Patterns book, so I will not review any more of them here. His numerous guidelines trim the possible candidates to just 10%, so I ignore about half of them and get nearly the same performance from a larger selection of stocks.

Returning to the chart, price climbed from a low of 5.77 to a left cup lip of 8.75, or 52%. The drop to the base of the cup was 25%. Price has returned to the level of the left cup lip, formed a handle and is now approaching a breakout. When price closes above the green line, then that is the buy signal. I will not wait for a close above the line because I prefer to buy in using a buy stop. Since the right cup lip high is at 8.81, I have placed a buy stop at 8.82.

I mentioned that I tried to buy this about 2 weeks ago. I had a buy stop at 8.81 and the stock hit that level during the day but my buy order did not activate. I did not question this with my broker because I figured the stock would drop, which it did. Anyway, the stock might punch through this time.

Volatility stop is at 7.85, or 8.2% below the current close of 8,51. It is also below the handle low, which I consider a plus. On the other side, I can see this stock moving up to 9 and 10 where it will run into round number resistance and more from prior peaks and a gap in early August. I think the stock could push through this and move up to 11, but that may be wishful thinking. The specialty chemicals industry ranks 5 out of 48, where 1 is best for price performance over the last 6 months. The stock is ranked 106 out of 550 stocks (1 is best) for price performance over the last 6 months.

What do the pros at S&P and Ford have to say? S&P says hold the stock. According to them, in late May the company was in talks to be acquired by a group of investors but this has not been confirmed. This news corresponds to the May 27 gap when media reports said that Blackstone was in talks to buy the company. A takeover deal could send the stock higher but how much is unclear. The news did not send the stock up much, so the upside may be limited should the talks become public and a formal offer made. Nevertheless, this is good news for the company.

Vickers reports that insiders (11 of them) were buying like crazy on February 28, but this looks like a company distribution of some sort than a bunch of insiders just deciding to buy the stock on the same day for many of the same number of shares.

Ford Equity Research says that the company is a hold with below average performance expected in the next 3 months. This does not give me warm fuzzies. The nightmare scenario is that Blackstone will buy the company for a markup, sending the stock gapping higher, and then my buy stop will kick in followed by a decline. I also do not like cups because they have a tendency to rise 10% to 15% and then die, pulling any profits into the grave with them.

Aftermath

I did not buy the stock which was a good thing because the cup with handle pattern never confirmed (a close above the top of the right cup lip). The company declared bankruptcy March 2009.

-- Thomas Bulkowski

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Tuesday, 6/17/2008. My HHGP trade: How to make 55% and lose money.

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

Over the last several weeks, I promised a few people that I would write about some of my trades. I discuss my trades from time to time, but I do not trade that often, so pickings are slim. I will describe one of them if it is noteworthy and nothing else in the marketplace is more exciting. You can find my trades in the blog archives and in the quizzes. The quizzes come as a compressed Word document, but there are 40 trades to choose from. Also, it takes several weeks before I copy a trade to the archives. I want to include an updated chart so you can see how price moved after I sold.

I show the chart of Hudson Highland Group (HHGP) on the daily scale. This is a trade I made, actually, six trades by my count (two occurred on the same day and one was a partial fill that I completed with a market order). I show the buy as a B on the chart and the sale as an S.

Here is a portion of my notebook entry for the first trade with my explanation in brackets.

Today’s date: 02/15/2008
Order details: Buy at limit 7.06 (and filled at 7.06). That's the 38% Fibonacci retrace of move from the 2/7/08 low. Day order. [The right shoulder of the head-and-shoulders bottom is February 7. The low on that day was 6.15 and the high on 2/14 (the day before I bought) was 7.72. A 38% Fibonacci retrace of this climb is: 7.72 - ((7.72 - 6.15) x 38%) = 7.12. I am scratching my head wondering why it does not equal the 7.06 entry price. No matter...].
Date bought: 2/15/08
Stop: 6.05 -16.6%. Stop used: 6.05, below the minor low on 2/7/08. [The stop was a volatility based stop and it was huge: 14.3% away (which differs from the notebook entry because my computer uses the current close and not the actual entry price, since I fill out the notebook before I buy). With low priced stocks, they are volatile and you have to give them room to breathe or you’ll be stopped out.]
Upside target: 9.11 according to scoring system (-1 score). [The scoring system said that the chance of reaching the median rise of 29.04% for a head-and-shoulders bottom was not good (-1 score). The average rise of head-and-shoulders bottoms with scores less than 0 is 24%. Those above 0 climb an average of 48%. See my book, Trading Classic Chart Patterns for more details.]
SAR: 8 then 12-13. [SAR is support and resistance].
Nearest phi extension: ~11. [This is another possible resistance zone. I don’t pay any attention to it].
Next earnings: about 3 months.
Weekly scale (industry, too): 8 stocks have hit bottom and begun to turn, 4 have not. They are continuing down. Weinstein stages show nearly all are in stage 4. One is in stage 1, and one in stage 2. On the monthly scale, it shows that several stocks are resting on long term trendlines. [Weinstein stages refer to the book, Stan Weinstein’s secrets for profiting in bull and bear markets where he splits the price chart into four stages. Stage 4 means the stock is dropping. 1 means the stock has pulled out of the dive; 2 means it is time to buy because the stock is moving up, and stage 3 means the stock has peaked and is now moving sideways, ready to drop in stage 4. I want to build a model portfolio using his method... It’s on my to do list].
Indicators: Nothing exciting. Price is near top of the Bollinger band.
Buy reason: head-and-shoulders bottom in a nice solid block of congestion with an upward breakout. But market is weak, probably causing a throwback. I think the industry has bottomed and even though the market is continuing down, I think this could hold its own. If I’m wrong, it’s just 1/4 position.

The following are more notebook entries.

2/27/08 I like the insider buying: a ton of it in the last month.
2/28/08 Stop raised to 6.60
2/29/08 I bought more shares, one was a partial fill that I completed with a market order. This has returned to congestion area so I viewed it as a buy.
3/24/08 Stop raised to 7.19.
3/26/08 Stop raised to 7.79.
4/1/08 Placed order to buy more, limit order, at $8.40. I lowered the stop from 7.79 to 6.73 because I felt the stop was too close and I want this trade to be a long term holding. The new stop is below a support line at 6.80.
4/8/08 I feel this stock will complete the rounding turn by pushing higher. So I’m going to day order more shares at 8.93. That is a 50% retrace of today's price action. After the buy, then raise the stop to just below the consolidation region. Filled today: 4/8/2008.
4/9/08 I had TWO buy orders on the stock and they both hit, one when price climbed and the second when it fell. Oops. I didn't realize I had the other outstanding.
4/19/08 Stop raised to 7.52.
4/29/08 Buy stop for more shares at 9.57. This is just above a congestion zone and the mirror looks like it should complete a rounding turn and head up. A buy will confirm that move and it’s one I want to be a part of.
5/1/08 My buy stop hit and filled at 9.57667. Stop raised to 7.93.
5/7/08 Stop raised to 8.55, volatility stop setting.
5/11/08? Stop raised to 9.21, below volatility stop of 9.37 and below 9.25 round number.
5/12/08 Stop raised to 10.13, inside the volatility stop but below the Fibonacci retrace of the move up from 5/5/08 and about midway down the tall candle on 5/6. It’s a risk but this should run now.
5/19/08 Stop raised to 10.43, just below the minor low. I am worried about a reversal.
5/20/08 Stop raised to 10.67, volatility setting.
5/21/08 Stop raised to 11.03, closing the stop to limit the give back.

Here is the notebook entry for the sale.

Date placed: 5/21/08
Date sold: 05/22/2008
Sell reason: My stop hit, just as I expected even though price closed higher. I tightened the stop because of the big 5+% decline yesterday for unexplained reasons (the market was also down big). Looks like I sold at the low for the day. I wanted to protect my profits.

As you can see in the chart, price continued higher for a few weeks, so I lost out on some money. Then price dropped and it closed today at 11.52. I made from 55.5% on the first trade to 14.6% on the last one.

-- Thomas Bulkowski

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Monday, 6/16/2008. Is Pfizer on life support? 300 Joules. Clear!

The chart of the Pfizer (PFE) on the daily scale

I show the chart of Pfizer (PFE) on the daily scale. A falling wedge appears as two converging but down-sloping trendlines, bounding price. The downward breakout from this chart pattern is unusual. Falling wedges breakout upward 68% of the time. Of course, weakness in the most recent quarter (Qtr) just contributed to what everyone knows: the company is in trouble.

Why do I say that? Because the stock peaked at 50 in 1999 and has been moving lower in an uneven decline since then.

Can you see anything in the chart that would get you excited?

Research Reports

A look at brokerage research says that the company reports earnings in a month (July 14). That means there is still time to get into the stock before the earnings report drives the stock nuts. Standard and Poors rates the stock a hold. The yield on this thing is up to about 7%, which is better than most utility stocks. Yahoo.com says that the payout ratio is 109% and that means they are paying out in dividends more than they are earning. This suggests a dividend cut, but S&P says "We believe stability in the $1.28 dividend is a high priority, and PFE will continue to adjust costs to maintain it."

S&P say that Lipitor represents an estimated 25% of total revenues in 2008 but it goes off patent in 2011 and it already faces lots of competition. Other recent patent expirations on Norvasc and Zyrtec show declining sales as generics take over. While the pipeline is large (more about that later), it is also a long way off to delivering drugs to market. And that is why the stock is dropping. Stock buybacks, cost cutting, and new drugs are helping but the downward price trend suggests that sales will continue to decline. S&P’s 12-month target is $23 for the stock from the current $17.99. The company has a $5 billion stock buyback plan in place. S&P says the fair value of the company is $24.60. In May, a group raised safety questions about Pfizer’s Chantix smoking cessation drug. That drug represented revs of $883m out of a $48 billion company, but sales of the drug are expected to double.

According to Vickers Stock Research, insider buying and selling is a mixed bag with more buying than selling.

Ford Equity Research rates the stock a hold but says to expect above average performance over the next 3 months. They say that share buybacks have cut outstanding shares by 3.6% over the last 12 months and they expect a 6% growth rate (but it's not clear what is growing: sales, earnings, stock price?).

Their research shows a valuation band and they explain it as "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" with the high band at 22.1 x EPS and the lower band at 8.4 x EPS. What’s the big deal? Price has pierced the lower band, suggesting the stock is a screaming buy. And that means you will yell even louder as price continues down... The upper limit on the band is near 50. If you buy now and sell when the P/E hits 22, you could more than double your money.

The P/E ratio, price/cash flow, price/book value and price/sales are all at 5 year lows. In short, on a value basis, this stock is a good buy.

A visit to the company website shows a breakdown of the drug pipeline: 47 programs are in Phase 1, 37 in phase 2, 16 in phrase 3 and 2 are in registration. Their chart shows that 29 programs advanced from one stage to another and 23 were discontinued. That left 102 active programs, the largest pipeline in the pharmaceutical industry.

Technicals

The chart of the relative strength index for Pfizer on the daily scale

So why have I spent a few hours researching the company and reporting it here? Because of the chart to the right. I was updating my RSI model portfolio (which some of you may have seen mentioned in the What’s New page). I haven’t provided a button for the model portfolios because it is still in development. Nevertheless, you can view the RSI one here. It shows Pfizer entered the portfolio on Friday. I took at look at the Wilder relative strength index (RSI) and got excited. As the chart shows, the indicator has dropped into the green buy band (the RSI drops below 20) and has pulled out again. A drop below 20 followed by a rise above it is the buy signal

What excites me is the failure swing, circled in blue. The little M or W patterns in an indicator are good hints of a trend change. The trend change may not last long, but the divergence is worth paying attention to. In this example, I wish the right bottom of the failure swing was higher than the left to denote bullish divergence, but I can live with what I see.

Summary

As a value play, the stock is a good buy paying a large dividend. The relative strength index says it is time to buy. The failure swing also says buy. Ford Research says that the stock will outperform in the coming 3 months.

But, price is dropping faster now than just a few weeks ago, so downward momentum is increasing. The stock could be in the blow-off stage, when holders get fed up and dump their shares. However, the rising volume trend does not support this (I think you should see more activity). Nevertheless, there was a tall volume spike about a week ago and some would argue that volume precedes price. So, this could be the bottom for the stock.

If you look at the RSI model portfolio, you will see that price declined after every purchase by an average of 8% and a median of 6%. Buying now is like trying to catch a falling knife. You might get lucky.

If the failure swing is correct and now is the time to buy, then expect a retrace of the most recent plunge. That would mean a climb to 18.50 (38% of the drop since May 19) to 19 (a 62% retrace). That is just a rise of 1/17.99 or 5.5%. Of course, the stock could move up much higher but my guess is it is too soon to buy. Certainly, the company is advertising like crazy, trying to prop up sales (meaning I see a lot of their commercials while I’m exercising). I think this next quarter will be a dismal one and price will again turn down, even if it does bounce up during the month to the July 14 announcement. I see support on the monthly chart at 16 and then at 13. Those might be attractive buy levels. That would be an additional decline of 11% to 28% from the current close (which is a bit higher than the maximum 22.5% decline experienced by the RSI model portfolio).

What you could do is buy the stock now and buy a protective put in the next week or two, assuming the failure swing does predict a rising price. The put should be cheaper for the same exercise price is price rises. Waiting on buying the put is a risky play because the stock could drop instead of bouncing here. Anyway, you make money collecting the 7% dividend (if you hold it through the ex-div date) and if the quarterly meeting results are worse than expected, you will profit from the put. Sell the stock immediately and hold the put until price bottoms. The safe play is to way for the earnings announcement and see if the stock drops to 16. Then it might be a buy on both the fundamentals and the technicals.

-- Thomas Bulkowski

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Thursday, 6/12/2008. Transports running on empty

The chart of the Down transports (^DJT) on the daily scale

It seems that all you have to do is predict that something will drop in this market and it does, not because you are right, but because everything is going down.

I show the Dow transports on the daily scale featuring a broadening top chart pattern. You may object to how I have drawn this one. The top trendline cuts through price, a little nubbin that looks as if you missed it shaving. Think of the line as an internal trendline, something I wrote about in my Getting Started in Chart Patterns book.

Anyway, price has closed below the bottom trendline in a one-day drop of 4.7%. That would be the Dow equivalent of 568 points. It seems likely that tomorrow (I am writing this on Wednesday evening) will see the transports retrace a portion of their losses if for no other reason than today’s drop was so severe. If the broadening top has anything to say, the average will continue moving lower.

There is a support zone (highlighted by the magenta line) setup by a number of peaks from August to October 2007 (the peaks do not appear in the figure). I expect this zone to slow the decline, maybe even stop it. If not, then there is always the right-angled and descending broadening formation in February. The flat top would make for a fine landing zone (shown as a green line).

Of course, with fuel prices destined to continue climbing, the average could plunge much lower. It could give back all of the gains made since March, taking it back down to 4,400 from the current close of 5,038. That seems far-fetched right now, but you never know.

-- Thomas Bulkowski

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Wednesday, 6/11/2008. Nasdaq in trouble?

The chart of the Nasdaq composite (IXIC) on the daily scale

I last wrote about the Nasdaq composite just a few weeks ago when it looked to be making a head-and-shoulders top chart pattern. I expected the composite to drop but it moved sideways instead, transforming a head-and-shoulders into an unconfirmed double top.

I show the double top as peaks A and B. I emphasize the word unconfirmed because the composite has to close below the valley between the two peaks (which I show as the green line beginning at valley 2) before it becomes a true double top. Until that happens, it is just squiggles on a chart -- meaningless -- in other words.

Could it also be a triple bottom? I show that possibility as valleys 1, 2, and 3. That patterns is also unconfirmed. To confirm the pattern as a triple bottom, the composite has to close above the taller of peaks A and B. But there is another problem with a triple bottom scenario. Price moves up into the pattern, not down as in a traditional triple bottom. Thus, this looks like a double top to me.

I show a support zone highlighted by the two parallel blue lines. The top one joins peaks and the bottom connects valleys. I would expect the composite to turn somewhere between those two lines if it drops and confirms the double top.

Since the composite is at a support zone now (because it has formed 3 bottoms near the same price), it could move higher tomorrow, eventually pushing above the top of the double top and busting it. That would be good news for holders of technology stocks. But we will just have to wait and see what develops.

-- Thomas Bulkowski

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Tuesday, 6/10/2008. How High is UP?

A reader of my new Encyclopedia of Candlestick Charts book found a minor error in a figure caption. You can find the corrections to all of my books here.

For those of you not visiting my home page, I released three studies within the last week. The most recent and the weakest of the three is pattern width. I looked at the time from pattern start to end and compared that to the time to reach the ultimate high or low. I found not relationship.

The next two studies explore comments made in a book. One deals with an extended right shoulder of a head-and-shoulders pattern. The extension denotes weakness in performance, and I also looked at pattern symmetry. The last study explores stop placement and money management. It is better to place a stop below the low on the day of breakout than to use a volatility stop.

###

The chart of the Continental Resources (CLR) on the daily scale

I first wrote about Continental Resources on April 8 when the stock closed at 34.04 (as of April 7, the day I posted the entry). The green line shows the day of the posting.

I wrote about the stock again on April 29 when the stock closed at 46.54 (April 28 close, as of the post). It had formed a high and tight flag.

The close as of June 9, is 73.93, a nice rise from the April close of 34.04. Price gapped up after the release of earnings in early May as the chart shows (Qtr). Will price continue to move up? That is the question every trader in the stock asks.

The stock is in the #1 industry for relative performance and it is the best performing stock of the 551 securities that I track daily. I think that the energy bubble will burst one of these days but it could be months before that happens. Meanwhile, you can ride the stock higher and hope for continued gains.

Other stocks in the industry may be more tempting. I show the list here.

-- Thomas Bulkowski

Symbol Chart Pattern Start End
APCHorn bottom01/22/200802/04/2008
APAPipe bottom03/17/200803/24/2008
ATWTriangle, symmetrical04/21/200806/05/2008
CXGPipe bottom03/17/200803/24/2008
CLRFlag, high and tight03/24/200804/28/2008
FSTRising wedge09/04/200710/08/2007
HPPipe bottom01/03/200701/08/2007
NBLPipe bottom01/22/200801/28/2008
OXYPipe bottom03/17/200803/24/2008
PDEPipe bottom03/17/200803/24/2008
XTOPipe top04/14/200804/21/2008

 

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.
 
Anadarko Petroleum Corp. (APC)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 47 out of 550
Latest close as of 06/09/2008: $79.50
1 Month average volatility: $2.60. Volatility based stop (assuming an upward breakout): $72.07 or 9.4% below the close.
Change year to date: 21.02%
Volume: 5,244,200 shares
3 month average volume: 4,698,286 shares
 
Chart pattern: Horn bottom reversal pattern from 01/22/2008 to 02/04/2008
Performance rank: 14 out of 23.
Breakout is upward 100% of the time.
Average rise: 35%.
Break-even failure rate: 9%.
Throwbacks occur 29% of the time.
Price meets the measure rule target 76% of the time.
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Apache Corp. (APA)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 27 out of 550
Latest close as of 06/09/2008: $141.99
1 Month average volatility: $5.02. Volatility based stop (assuming an upward breakout): $125.21 or 11.8% below the close.
Change year to date: 32.03%
Volume: 6,126,700 shares
3 month average volume: 3,552,075 shares
 
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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Atwood Oceanics Inc. (ATW)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 76 out of 550
Latest close as of 06/09/2008: $105.42
1 Month average volatility: $4.26. Volatility based stop (assuming an upward breakout): $95.58 or 9.3% below the close.
Change year to date: 5.17%
Volume: 776,300 shares
3 month average volume: 609,091 shares
 
Chart pattern: Triangle, symmetrical continuation pattern from 04/21/2008 to 06/05/2008
Performance rank: 16 out of 23.
Breakout is upward 54% of the time.
Average rise: 31%.
Break-even failure rate: 9%.
Throwbacks occur 37% of the time.
Price meets the measure rule target 66% of the time.
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CNX Gas Corp (CXG)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 33 out of 550
Latest close as of 06/09/2008: $42.65
1 Month average volatility: $1.31. Volatility based stop (assuming an upward breakout): $39.19 or 8.1% below the close.
Change year to date: 33.49%
Volume: 358,700 shares
3 month average volume: 282,672 shares
 
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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Continental Resources Inc. (CLR)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 1 out of 550
Latest close as of 06/09/2008: $73.93
1 Month average volatility: $3.93. Volatility based stop (assuming an upward breakout): $63.94 or 13.5% below the close.
Change year to date: 182.93%
Volume: 1,383,500 shares
3 month average volume: 386,331 shares
 
Chart pattern: Flag, high and tight continuation pattern from 03/24/2008 to 04/28/2008
Performance rank: 1 out of 23.
Breakout is upward 100% of the time.
Average rise: 69%.
Throwbacks occur 54% of the time.
Price meets the measure rule target 90% of the time.
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Forest Oil Corp (FST)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 17 out of 550
Latest close as of 06/09/2008: $73.49
1 Month average volatility: $2.54. Volatility based stop (assuming a downward breakout): $79.75 or 8.5% above the close.
Change year to date: 44.55%
Volume: 922,700 shares
3 month average volume: 934,432 shares
 
Chart pattern: Rising wedge reversal pattern from 09/04/2007 to 10/08/2007
Performance rank: 20 out of 21.
Breakout is downward 69% of the time.
Average decline: 14%.
Break-even failure rate: 24%.
Pullbacks occur 63% of the time.
Price meets the measure rule target 46% of the time.
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Helmerich and Payne Inc. (HP)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 5 out of 550
Latest close as of 06/09/2008: $66.76
1 Month average volatility: $2.24. Volatility based stop (assuming an upward breakout): $60.71 or 9.1% below the close.
Change year to date: 66.61%
Volume: 1,032,300 shares
3 month average volume: 1,200,466 shares
 
Chart pattern: Pipe bottom reversal pattern from 01/03/2007 to 01/08/2007
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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Noble Energy Inc. (NBL)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 34 out of 550
Latest close as of 06/09/2008: $103.49
1 Month average volatility: $3.27. Volatility based stop (assuming an upward breakout): $93.62 or 9.5% below the close.
Change year to date: 30.14%
Volume: 1,722,700 shares
3 month average volume: 1,563,952 shares
 
Chart pattern: Pipe bottom reversal pattern from 01/22/2008 to 01/28/2008
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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Occidental Petroleum Corp (OXY)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 43 out of 550
Latest close as of 06/09/2008: $93.56
1 Month average volatility: $2.93. Volatility based stop (assuming an upward breakout): $86.36 or 7.7% below the close.
Change year to date: 21.52%
Volume: 7,399,500 shares
3 month average volume: 6,964,591 shares
 
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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Pride International Inc. (PDE)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 29 out of 550
Latest close as of 06/09/2008: $45.31
1 Month average volatility: $1.44. Volatility based stop (assuming an upward breakout): $41.89 or 7.6% below the close.
Change year to date: 33.66%
Volume: 2,202,100 shares
3 month average volume: 2,705,622 shares
 
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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XTO Energy Inc. (XTO)
Industry: Petroleum (Producing)
Industry RS rank: 1 out of 45
Stock RS rank: 46 out of 550
Latest close as of 06/09/2008: $67.72
1 Month average volatility: $2.37. Volatility based stop (assuming a downward breakout): $73.09 or 7.9% above the close.
Change year to date: 31.85%
Volume: 5,221,600 shares
3 month average volume: 3,992,528 shares
 
Chart pattern: Pipe top reversal pattern from 04/14/2008 to 04/21/2008
Performance rank: 4 out of 21.
Breakout is downward 100% of the time.
Average decline: 20%.
Break-even failure rate: 11%.
Pullbacks occur 41% of the time.
Price meets the measure rule target 70% of the time.
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Monday, 6/9/2008. How Now Dow?

The chart of the Dow Jones industrial average (^DJI) on the daily scale

It is Friday evening and I know many of you are wondering what is next for the Dow? I have an answer. It is probably wrong, but I still have an answer. My answer appears in the daily chart of the Dow industrials (^DJI). It shows a complex head-and-shoulders top chart pattern. This one has two heads and two shoulders (LS and RS), and price confirmed it when it closed below the green neckline.

The key to finding a price target is the measure rule. To use it for a head-and-shoulders pattern, draw a vertical line from the head to the neckline directly below. I show that as a magenta line. The height of the pattern is the difference between the head and the intersection of the magenta line and the neckline: 13137 - 12372 = 765 points. Since this pattern has a dual head, I used the middle distance between the two heads to project the magenta line.

Next, use the price at which the average pierces the neckline as the breakout price and subtract the height from it: 12496 - 765 = 11731. I show this measure as another vertical magenta line that intersects a blue trendline. The actual point (11731) is probably a bit farther down the magenta line than shown. Price reaches the target 53% of the time, which is not great. Thus, I would use a more conservative target and massage the height by multiplying it by 53% and applying it again. 765 x 53% = 405. 12496 - 405 = 12,091. Let’s call it an even 12,000, which is a nice round number and probably one that will show support. It is also about 200 points below where we closed today.

I also show a horizontal support line in red formed by connecting prior valleys. The line suggests the Dow will make a new low then begin its retrace of the recent decline on Monday. I say that only because the line is close to the current close.

Another chart pattern to project a target price is to use the measured move down. I show that pattern as the ABCD stair step move. The AB move should approximate the distance and time of the CD move. If that is true, then what is the price of target D? The peak at A is 13137 and the low at B is 12443 for a first leg height of 694. Projecting this height downward from the peak at C (12727) gives 12,033. And that is very near the measure of the head-and-shoulders target.

These two price targets are not additive, meaning just because the two are close to each other is no reason to believe they will give more support to a turn there.

There is a blue trendline drawn connecting the recent lows. If and when price reaches the trendline, I would expect it to bounce off it.

The Dow could make a third low, forming an unconfirmed triple bottom chart pattern with a bottom near the full measure that we first calculated: 11,731. That is certainly possible, but I think the Dow will turn before then.

My guess as to what will happen to the Dow, is that it will hit 12,000 and then start to rebound. I expect it to bottom quite near the blue trendline.

-- Thomas Bulkowski

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Thursday, 6/5/2008. Emerging Market Fake out

The chart of iShares MSCI emerging markets index fund (EEM) on the daily scale

The chart shows the exchange traded fund, iShares MSCI Emerging Markets index fund (EEM) on the daily scale. The fund seeks to duplicate the performance of the MSCI emerging markets index, an index that tracks the international markets.

Highlighted in red is a head-and-shoulders top chart pattern, with the red neckline penciled in (well, think of the electronic version of a pencil). The head-and-shoulders pattern is bearish, so you would expect the ETF to drop. The question is, how far?

You can use the measure rule to help determine the target price. In words, you take the high at the head and subtract from it the value of the neckline directly below, giving you the height. From the breakout price subtract the height to get a target. The breakout price is the value where the ETF crosses the neckline.

Price reaches the target 55% of the time. For a more conservative target, multiply the height by 55% and continue as before.

What interests me about the chart is the question of how far will price fall? With an ETF, index, or average, determining the reversal price is a bit tougher because you are making a bet that the underlying securities will turn at nearly the same time.

To gauge how far price is likely to drop, I look for support zones. Those are areas highlighted by prior peaks and valleys, but include other features such as round numbers, moving averages, trendlines, and Fibonacci retracement levels. I show two potential reversal points by the horizontal green lines. Circled in magenta on or near the lines are peaks and valleys, where price has bottomed in the past. We can expect price to bottom there in the future, too, but there is no guarantee of that.

Since the ETF is close to the top line and not far above the bottom one, this would be a poor choice as an investment candidate. I would expect price to reverse at one of those two lines. If price were to puncture both of those support zones, then I would expect it to find support at the blue trendline that connects lows B and A. It might also turn at the 38%, 50%, or 62% retracement of the move from A to the head.

Before you trade, make sure you conduct this type of analysis and include how far price is expected to climb, as well. You may want to place an order to sell there.

-- Thomas Bulkowski

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Wednesday, 6/4/2008. The Dohmen Setup

If you read my book review of Swing Trading, featuring Bert Dohmen, then you might be excited about trading one of his setups. I am going to make it easier for you today because I found a few candidates that just might work.

Let’s review his position trading setup.

  1. Own no more than 10 to 20 stocks split into 3 or 4 industries, with a maximum of 5% in any one position. The key Bert is trying to make with this rule is diversification. Put as many stocks in your portfolio as you can comfortably handle, providing you do not concentrate them in any one industry. I have a preference to pick stocks from several industries, not just 3 or 4.
  2. Select the strongest stock in the strongest sector. Bert is looking for a momentum play: Buy high and sell higher. The stock I chose for this exercise I picked from the top 5 ranked sectors for performance (out of the 48 that I follow).
  3. The sector should be trending higher, along with the stock. A quick check of other stocks in the industry will verify that many are moving up, too. The top relative strength ranking also reinforces that you are playing in a hot sector. To this list, I would add the general market. If the S&P is not trending upward, then avoid this type of momentum setup. With the Dow industrials trending lower, this is not a good time to buy any stock from the long side.
  4. Look for a stock making a yearly high, preferably a multi-year high. I used a monthly chart to look for trends. We will see it in a moment.
  5. Look for a high volume breakout from a congestion area. The congestion area is easy to find, but I would use a buy stop to enter the position on the breakout and hope that high volume is present. If not, I don’t care, but that is my preference.
  6. On day of entry, place an initial stop below the low of the prior day. This is a tight stop. If you correctly pick the momentum play, price should continue to move up. If it doesn’t then get out. I would be nervous with such a tight stop. I only place a stop below the prior low when I am day trading in a strong upward price trend (price has little or no overlap). This also works for non-day trades, too, but I only use that when I am nervous about a stock reversing.
  7. Once the stock moves in your favor, place a trailing stop 10% to 12% below the close each day, below a trendline, or below the 21 or 50 day moving average. Presumably, this will allow price to retrace and not stop you out. When you change from the prior low to a stop 10% away is unclear. If the position survives placement of the initial stop and price moves higher, then I would apply the trailing stop.
  8. Use a 38% to 62% Fibonacci retrace of the prior up move to add to the position or when it retraces to a support level. In a strong move up, the stock will not retrace, but often it will pause along the way. That would be the time to add to a position. If price breaks down through support, then sell the entire position.
  9. The chart of Nabors Industries (NBR) on the daily scale
  10. Each successive buy should be smaller than the prior buy. This is averaging up instead of down, but fewer shares are purchased each time to keep the average price as low as possible. What you don’t want to happen is to buy small at first and add more shares as price rises so that the last buy is the largest of the group. When price reverses, you may suffer a loss. If you buy large and then taper down as price rises, you stand a better chance of retaining your profit when price reverses.
  11. Draw a trendline at least 2 months long and use that as a potential exit signal when price closes below it. Confirm this with other indicators. I often use a trendline penetration as an exit signal. You may confirm it with divergence or maybe a sell signal from an indicator. Perhaps price pierces your favorite moving average.

I show a chart of Nabors Industries on the daily scale. Price formed a descending broadening wedge followed by a rectangle top. A rectangle is often a good congestion region for the Dohmen setup. The breakout often occurs on high volume but it settles down quickly. In this stock, price has formed a congestion area where price has moved sideways for about two weeks.

I selected this stock because it comes from an industry ranked 5 for relative strength among 48 that I follow. Individually, the stock has a rank of 16 out of 551 stocks for price performance over the prior 6 months. Most of the stocks in the group are pausing but are at or very near the yearly highs. The oilfield services and equipment industry is neighbors with the petroleum and natural gas industries that seem to have made being in the top 10 a permanent fixture.

The chart of Nabors Industries (NBR) on the monthly scale

As I look at the top picture, what bothers me are the wicks on the candles. It suggests a reluctance of price to move higher. When price does climb, the bears force it back down. Thus, an upward breakout is likely to be a bumpy ride. As I write this 2 hours before Tuesday’s close, price has reached 43 and dropped. If you decide to trade this stock then I would not recommend placing a stop below the prior low, but below the congestion region.

This next chart shows the stock on the monthly scale. I wanted to see if the yearly high translated into a multi-year high. It does. I drew red lines from each peak forward in time to emphasize what price does. Notice that each time the stock moves above the prior high for a bit and then retraces. Whether that will happen this time is anyone’s guess, but be prepared for it to make a new high and then reverse. The move from A to B is 35% and B to C is 32%. Thus, it looks like a 25% to 30% move might occur before price reverses.

If this stock does not float your boat, then perhaps these suggestions may work out better. Anadarko (APC) is in the producing petroleum industry (ranked 1 out of 48 for performance) and the stock has a relative strength rank of 53 out of 551. It is near a multiyear high on the weekly charts but on the daily it needs to surpass a peak made about a week ago.

Energen (EGN) is a diversified natural gas player (ranked 2/48 and 111/551). The stock shows a nice tight consolidation region in a stock that has been trending upward for years (weekly scale). I like this one as much as Nabors Industries but look for more of a retrace (downward breakout) from the congestion region.

Praxair (PX). This stock is from the diversified chemicals industry, ranked 4/48 and 137/551. The congestion region is loose looking and price will probably take a few days to push higher. Since late last year, the swings have become more violent, suggesting a top to me, but you never know. This is not my best pick because price is too loose and it looks to be forming a head-and-shoulders top.

-- Thomas Bulkowski

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Tuesday, 6/3/2008.

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

A few announcements...

I finished redoing the research on the Wilder relative strength index and corrected the web page. No real surprises, but I included additional research provided by Tom Helget in an Excel spreadsheet. It covers all of the variations that my software does (plus a lot more) and uses rules similar to the ones I used.

I also released a new book report on Swing Trading by Jon Markman. It is a lot like Market Wizards in that Jon interviews other traders. I discuss what I found important in the book.

As a reminder, if you buy anything from Amazon.com (it does not have to be one of my books), please do so through this website. They pay for the referral (at no additional cost to you) and that helps support this site. Just click on a picture of a book and that will automatically take you to Amazon.com.

Let us examine the chart and do some panning for gold. I show GLD on the daily scale and the exchange traded fund is one I have mentioned before. In fact, in the May 7 posting, I expected GLD to drop to 79. Instead, it moved up and formed the head-and-shoulders bottom, pictured in the chart. There is just one problem: it is not a head-and-shoulders bottom. What is wrong with this picture? I could claim that the chart is about as clear as a new digital TV converter fitted with rabbit ears (antenna). In my house, it seems that only a 50' ham radio tower will work with the new boxes.

The head-and-shoulders bottom will become a true pattern once price closes above the neckline. That hasn’t happened yet so all you see is a bunch of bumps. For now, GLD seems poised to move higher, probably touching the green neckline and maybe moving up beyond that. I show a pause at the neckline, followed by a resumption of the rise. As GLD approaches the old high, I expect more consolidation as sellers that bought long ago try to dump their shares. It might form a double top then.

Please stay tuned and the repeating sound you hear is your TV set trying to tell you to move the antenna a little to the left then the right then to the right a little more. You get the picture...

-- Thomas Bulkowski

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Monday, 6/2/2008. I have GAS and I know how to use it!

The chart of Nicor (GAS) on the daily scale

This is a chart of a trade I made in Nicor (GAS). I last wrote about Nicor in my March 31 post when I talked about a symmetrical triangle forming in the stock (I actually posted the note the day before, just as I do for nearly all of my entries). I show that pattern surrounded by two converging red trendlines in the chart to the right.

I placed a buy stop at 34.03, just as I suggested in the post. After all, what good is talking about stock medicine if I am not willing to taste it myself? I bought the stock on April fools day (4/1/08) and received a fill at 34.03667 for about half the usual position size. Why half? Because I did not trust the trading environment. Two weeks before the trade, I suggested that the Dow was going to make a short bounce upward and then drop to 11,000. The Dow closed higher the next day then dropped for two days, making a new lower low. Instead of continuing down, however, the average moved up in a run to the May peak. I entered this trade on the breakout from the symmetrical triangle, but just as the Dow was approaching overhead resistance, setup by prior peaks in February.

Even though the tight symmetrical triangle (and by tight, I hope you know what I mean when contrasted with a loose pattern, one with price meandering all over the place. A tight pattern has lots of price overlap from day to day and it tends to move in a straight line forward, not meander up and down a lot) posed a delicious buying opportunity, it was not the only facet to catch my eye. I also liked the quick down move, shown by the steep drop in the stock during February when price slipped from about 42 to 32, almost a 25% plunge. I felt that price would rebound, perhaps do it rapidly, too. The quick decline suggested a Big W type pattern, but this one had a symmetrical triangle as the reversal catalyst and not a double bottom. As a utility, the stock also had a yield of 5.7%, but with an unknown hold time, it was unclear whether or not I would actually collect it.

Weakness in the market helped push the stock lower and it threw back to the triangle. Notice that the apex at A matches the end of the throwback exactly. I have tested this in a study of such behavior and found that price turns between 60% (direction change) to 75% (finding a minor high or low) of the time within 4 days of the apex.

Once I was in the trade, I placed a stop loss order at 32.29, 5% below the buy price. This was below the bottom of the triangle and closer than the 31.29 volatility stop suggested. Even though I could be stopped out on normal price action, I felt that the triangle acted as a support zone, and I would only be cashed out if the stock reversed with gusto.

The upside target was 40 then 42 and 45 with overhead resistance at 35, 39 and support at 30 (see the March 31 post for resistance at 39).

A day after buying the stock, I raised the stop to 32.78, in line with the volatility stop recommended setting. That means it was now safe to raise the stop to 32.78 without having to worry about being stopped out on normal price fluctuation. The new stop would be just below the price of the triangle’s apex.

I wanted to add to my position on April 16, but the stock gapped upward and I was not going to chase it.

On April 19, I raised the stop to 33.36.

On April 29, I placed a buy stop order at 36.03, just above the congestion region that had formed. As luck would have it, price gapped high and I bought into the stock not at 36.03 but at 36.68! Talk about slippage, that move was back breaking! I raised the stop on both positions to 34.52.

I raised the stop to 36.38 on May 3 and to 36.92 on May 7. By May 12, I was getting nervous. I tightened the stop to 37.92, inside the volatility stop setting. I felt that the stock would form a handle and I did not want to be a part of the coming retrace.

A week later, May 19, I decided to sell the stock. On the weekly chart, the stock had reached overhead resistance at the round number 40 and I felt that energy prices were frothy, a word I used to describe them in past blog entries. I received a fill at 39.03 and made 14.5% on the first trade and 6.3% on the second. As the chart shows, I sold too soon, but that is the way it goes sometimes.

-- Thomas Bulkowski

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