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Bulkowski’s Blog Archive: CHIC

Blog Posting: March 27, 2008, The Charlotte Russe Trade (CHIC)

The chart shows two trades I made in Charlotte Russe (CHIC) on the daily scale. I bought the stock twice, the first time was on January 29 and I sold it four trading days later for a net profit of 8.8%. I bought because of the ugly double bottom (bottoms 1 and 2) and breakout from a small congestion region (a few day wide). I also considered it a busted head-and-shoulders top. The busted part means price broke out downward but turned around and then moved above the top of the pattern. Busted patterns often make for good trades. I did not log the reason for the sale, but I raised the stop twice along the way (based on volatility) and was not stopped out. I just decided to sell, perhaps trying to keep the gain in this volatile market. The timing of the sale was quite good, exiting near a minor high.

The second trade began on February 11 because price had continued to move up, and that means it broke out to a new high. Ten days later, the company announced a Dutch auction tender offer for a purchase price of between 18 and 20, ending March 20 but now extended to April 2. I raised the stop three times as price climbed, ending at 18.57. That is just a few pennies below the congestion region in March, shown as a green line. I narrowed the stop because I was concerned that price would break out of the congestion region and drop.

Today, (I am writing this on 3/26), the stock gapped open lower after the company forecast a weak third quarter. The stop executed and took me out not at 18.57 but at the opening price of 17.59. What was a four figure profit turned into a three figure loss. Sigh.

I am surprised that the stock moved below the 18 offer. There is no guarantee that the company will buy all of your shares at 18 (it may be prorated), but you could buy the stock now and offer it to the company at 18 or higher. You could receive between 18 and 20 a share. I am not recommending this (and I do not plan to rebuy the stock), but it is an idea.

Aftermath

The chart shows a zoom-in of the price action surrounding the two trades. The sale of the first trade was just a day off the high. The second buy occurred on a day that turned into a northing doji candlestick. After an uptrend, if you believe candle theory, price is supposed to drop after a northern doji appears. You can sell how awful that bearish prediction turned out because price continued higher. My testing of the candle revealed that it functions as a continuation 51% of the time in a bull market. In other words, the breakout direction is random. See my book, Encyclopedia of Candlestick Charts, pages 248 to 256 for a detailed analysis of the candlestick.

I am gratified to see that the stock has dropped to a price (at A) below my sell point.

The Dutch tender offer completed at a price of $18 a share -- at the bottom of the 18 to 20 range. I expected a higher price since the shares traded above 20 for part of the time, but the plunge that hit my stop occurred before the auction completed, and that changed stockholder thinking.

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.