Below is a slider quiz to test your trading ability. Captions appear below the pictures for guidance, so be sure to scroll down far enough to read them.
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What chart patterns can you find? Look for the following: rectangle top, descending broadening wedge, falling wedge, triple bottom if you combine the first two bottoms - it's
also a Big W, ascending scallop, and simple ABC correction.
Answers are on the next slide.
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The simple ABC correction is the mystery pattern. Think of it as a measured move down nested inside a measured move up. If you're not sure what all of that means then check my website.
You won't find the ABC pattern in my Encyclopedia...
Question 1: Do you buy, short, or avoid trading this stock?
Question 2: If trading this one, what is the target price?
Question 3: If trading this one, what is the stop price?
My answers appear on the next slide.
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Answer 1 (buy?): Buy when price closes above the trendline drawn from 4 to 5.
Answer 2 (target?): Let's assume price breaks out upward. Many will reverse at 4 and form a double top, so keep that in mind. You can use the move from 3 (third bottom of the triple
bottom, in October 2002, not shown) to 4, projected upward from the low at 6, in a measured move up chart pattern. That gives a target of 28.17, which is huge. I would be more conservative. The average rise of
the 2nd leg is 31%. That would place a target of 14.75 (the low at 6) x 32% = 19.50. That's still a lot but it's better than 28.
Answer 3 (stop?): If I bought now, the day after point 6's low, I'd use a volatility stop (2x volatility is $1.11): $13.33 for a potential loss of 10.7%.