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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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Bulkowski's Trade in Hecla Mining

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Busted
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 09/18/2017
22,331 63.01 0.3%
9,515 -31.61 -0.3%
739 -7.54 -1.0%
6,455 6.17 0.1%
2,504 3.64 0.1%
YTD
13.0%
5.2%
12.0%
19.9%
11.8%
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.

 

Hecla Mining Backstory

Few of the trades I have made recently have I been excited to get out of as the one in Hecla Mining stock on Friday. That day, the Dow dropped 315 points, or 2.5%. Let me tell you about the trade.

I show the chart of HL on the daily scale. Price made a symmetrical triangle (red converging trendlines) in November, setting the stage for a sharp drop. Price bottomed in a congestion pattern called a head-and-shoulders bottom. The neckline connecting the two armpits, I show in green. Since the neckline slopes downward, a buy signal occurs when price closes above the line. If the neckline were to slope upward, then I use the right armpit high as the buy signal (because price may never close above an up-sloping neckline). I either missed the buy signal or chose to ignore it.

Hecla Mining Entry

Hecla Mining stock on the daily chart

I placed a buy stop at 10.35, which is two cents above the congestion area (the small knot just before C) because I wanted to catch a breakout as soon as possible. I bought the stock at C, the white candle, and received a fill at 10.34 (due to price improvement by my broker). Since I was worried about the markets, I limited my position to half the normal size (which is twice the 1/4 position that I have been using recently). Target was 12+ and I bought this not only for the head-and-shoulders, but the Big W.

I call a Big W any congestion pattern at the bottom of a decline having a tall left side. Here, point A marks the beginning of the Big W with the head-and-shoulders as the congestion/reversal pattern at the bottom. The theory behind a Big W is that price will rise to the launch price (A), stall for a bit and maybe form a handle, and then continue rising.

I placed a stop at 9.16, which is 11.4% below the buy price. According to volatility, that is the closest position for a stop and it was also just below a 62% Fibonacci retrace of the move up from the right shoulder low (RS = right shoulder, LS = left shoulder). If price dropped below that point, then there was a good chance that it would keep on moving down.

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As the chart shows, price closed higher the day I bought, retraced for a few days and then shot upward in a straight-line run. On Thursday night, I looked at the stock and the first thing that popped into my mind was "It's going to reverse." Sperandeo's book, Trader Vic--Methods of a Wall Street Master, calls that a 2B top. Price rises up to meet the price of a prior high and fails to continue moving higher (sometimes not quite making it to the old high and sometimes rising just above it, but when price stalls, it's time to sell), signaling a reversal.

If I was thinking of selling then others were too, and in these markets, making money on the long side is a gift. Price may continue higher in the coming days but who cares? I don't own the stock anymore. And by the way, I chose this stock to trade in part because it has a industry relative strength rank of 4 out of 49.

On paper, I had 13.8% profit in the stock, so I felt it was time to exit especially in these volatile times. I placed a limit order to sell it at 12.08. Why 12.08? Because that was the value of the apex of the symmetrical triangle at A. I know that the apex is a resistance/support point, so I felt it would coast upward to there and stall. Also, since it was near the 12 round number, it might reverse there, too.

On Friday, the pre-market trading showed the stock gapping lower. Bummer, but the gap was not too large. I hoped that price would fill the gap. I day traded it and watched price drop to 11.60 and hold. Since price was forming a base at 11.60, if it pierced that, it would go down quickly, so I vowed to sell if that occurred. I also knew that 15 to 20 minutes into the trading session, price tends to reverse direction, so I waited for that to occur. The turn came later than I expected but price moved up (and I used level II to see the bid/asked orders to determine buying demand and selling pressure. There appeared to be larger buying orders than selling).

The stock continued rising and climbed above the prior close of 11.77 and I knew that I could at least grab my 13% gain. But the stock kept moving up. I waited and hoped that it was going to hit 12. It never did. Price peaked at 11.93 and moved horizontally for a few bars. Knowing that overhead resistance at 12 was just above, I decided to sell and got out five cents below the high for the day. Price dropped substantially and closed at 11.50. On the trade, I made (after commissions and fees) 14.7% in nine days. Yippee!

 

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The Hecla Mining stock on the daily scale

Hecla Mining Aftermath

The chart shows a zoom-in of the price action surrounding the trade. After I sold, price moved horizontally then higher, so I could have done better on the exit. Price peaked at A before plunging dramatically to B and then recovering.

I did not know this at the time because I sold before the day ended, but the chart shows a wonderful bearish harami candlestick on the day I sold.

In theory, a bearish harami is, well, bearish, but my testing shows otherwise. It is actually bullish 53% of the time, which really means the breakout direction is random.

As the chart shows, price broke out of the bearish harami upward, despite what candle theory says. See my book, Encyclopedia of Candlestick Charts, pages 374 to 382 for a detailed analysis of the candlestick.

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.

-- Thomas Bulkowski

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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. Federal Bureaucrat Virus: Divides your hard disk into hundreds of little units, each of which does practically nothing, but all of which claim to be the most important part of your computer.