Bulkowski's Perficient (PRFT) Trading Quiz

What chart patterns can you find? Look for the following (if you find others, great!): broadening formation, right-angled and ascending. Yes, there's only one pattern shown on this slide.

Price has broken out of a small knot of congestion in the 50 area (circled).

Answer 1 (buy?). The correct answer is to do nothing. Covid is about the drop the stock from a high of 53.76 to a low of 18.88, or 65%. But I didn't know that, so I bought the stock, filled at 51.89.

Here's what I wrote in my notebook.

"Date bought: 2/5/20. [I cut the position size to almost half normal] because I'm concerned this will either tumble on bad earnings or go sideways."

Answer 2 (target?): "SAR [support and resistance] and upside target: support at 49-50 [shown circled on the prior slide], so it just broke above congestion."

Answer 3 (stop?): I didn't use a stop loss order. Why didn't I sell? I picked out a stop loss value of 48.79 or 5% below where the stock was trading, but I never placed it with my broker. This was a long-term holding and I don't have a hair trigger on those positions (meaning I'm willing to ignore price burps). In this case, I didn't think Covid was a big deal, the position size was half normal, and the reasons for buying the stock hadn't changed. The stock began dropping at the same time as other stocks but the earnings announcement on 2/25 helped power the stock lower. I broke my rule of never buying a stock within 3 weeks of an earnings announcement and the large decline is the reason why I have the rule. However, I took the opportunity of the large price drop to buy more shares (average down). I don't include that trade in this exercise.

This is how I traded the stock. I'm not saying this is how it should have been done.

More from my notebook: "Next earnings: 2/25. Weekly scale: Just keeps moving up, but that's since Jan 2019. Before that, it was horizontal, which isn't good. Chart pattern traded: None. Congestion breakout in a hot sector. Buy reason: Flush with cash and I want to spend it in a hot sector."

What chart patterns can you find? Look for the following: diamond top, descending triangle, and triple bottom.

The stock broke out upward from the descending triangle, completed a throwback, and has resumed the upward move.

What do I do now? Sell, buy more, hold, or short the stock?

My answer is I held on. It took a year for the stock to recover from the 65% Covid drop.

Fast forward one year to August 2021. The stock has climbed from 18.88 at the Covid low to 107. I bought at 51.89, so instead of losing more than half my money had I sold at the Covid bottom, I've doubled it.

What do I do now? Sell, buy more, hold, or short the stock?

Answer (buy?): Hold. Candle 3 corresponds to the end of the prior slide. Notice that starting from candle 1, each price bar has a higher high. That strong upward trend is what I look for when I switch to a trailing stop.

I've double my money so I want to protect my gains. On half of my position, I placed a trailing stop (the other shares, from a second buy at a lower price, I still hold). I put the stop a penny below candle 3 (after the close of trading on bar 3) and each day I put it a penny below the day's low as price climbed.

The inset shows price bars 3 and 4, just to highlight that bar 4 has a higher high than bar 3.

Candles 1 through 8 describe a candlestick pattern called 8-new price lines. Candle theory says it's a bearish reversal pattern. My analysis? It's a bullish continuation pattern but only 53% of the time. If the pattern worked reliably, there'd be no 10, 12, and 13 new price line candles, all of which are bearish. Go figure. For full details, buy a copy of my Encyclopedia of Candlestick Charts book.

If you owned the stock, what would you do? Sell, buy more, hold, or short the stock?

I held on and continued to use a trailing stop, placing the stop a penny below the low after trading ended each day.

The lower red dot shows where I began trailing the stop loss order (three days after a strong uptrend begins). The uptrend continued to the higher red dot where the next day, the stock triggered the stop and I sold half my shares. I bought at 51.89 and sold at 118.19, making 128% on the trade in just over a year and a half. I continue to hold the remainder of the position.