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Bulkowski’s Blog Archive: CACH

Blog Posting: March 5, 2008, The CACH Trade

The apparel industry (or specialty retailers, if you want to lean in that direction) has a lot in common with the housing industry: Both are suffering. I refer you to the chart of Cache. The stock formed an Adam & Adam double bottom. This became a true double bottom when price closed above the confirmation price, A. I became very interested in the stock when I learned that they added 1 million shares to an existing 2 million share repurchase plan. That means the company was on track to reducing the number of shares by 18%. When Savient Pharmaceuticals (SVNT) bought back 16% of their shares during a Dutch Auction tender offer, the stock moved from a high of 6.66 to 24.55 in less than 1.5 years. I was hoping, and still am, for a similar move in this stock. Thus, if you want to know what I’m buying, this is it.

Anyway, the double bottom confirmed and price formed a handle of sorts -- a consolidation region with a flat bottom and descending top. After I sold the stock, I connected the lines and formed a descending triangle, but I'm jumping the gun. I bought the stock as a throwback to the double bottom. It looked as if the stock was moving up, so before the close I bought and received a fill at 10.62. Here’s what I wrote in my notebook: "Buy reason: throwback to AADB with 21% stock repurchase program in effect and new CEO promoted within. This is a management turn around play, but it's an upscale mall retailer and I don't like that model. I fear that this will triple bottom. Price has retraced 38% of prior up move. Lots of little insider buying recently 700 to 5k shares (13 buying, none selling in last 6 months). Ford Equity said expect below avg performance in next 1 to 3 months."

I thought the buyback was for 21% of shares outstanding but a news report places it at 18%. Their report was in January and I was using late February numbers, so maybe fewer shares were outstanding when I checked. Price retraced 38% of the move from B to C and I felt that was a support zone. That is true because price formed a flat bottom on the descending triangle. I liked what I saw so I bought the stock.

I placed a stop not where volatility said to (at 9.21 for a massive 16% potential loss), but below the horizontal support zone of the descending triangle and also below the round number 10, at 9.93. I did not want to place it too close to the triangle for fear of being stopped out on normal price fluctuation. The next day, the NEXT day, I was stopped out when the Dow lost 315 points, for a 6.9% loss. I looks now like my prediction of a triple bottom may be coming true. That remains to be seen because price can reverse at 50% (where it’s at) to 62% of the BC move. I now expect this to reach the 62% retrace and to reverse there, but that is just a guess. Whatever it does, I hope it takes at least a month so I can clear the wash sale rule and buy it again.

Aftermath

This chart is a zoom in on the price action both before and after the trade. The descending triangle appears within red lines. I bought the stock the day before price dropped out of the triangle and sold when that happened. Then price pulled back and busted the pattern when it closed above the top trendline. Price peaked at A, nearly at the triangle apex. With triangles, the apex projected upward or downward, often marks a major turning point, so that is something to look for. Anyway, price is now retracing the prior rise.

In the figure, the bought and sold arrows do not point to the prices at which the transactions occurred, rather to the days when they occurred.