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Bulkowski’s Blog Archive: WIRE

Written and copyright © 2008 by Thomas N. Bulkowski. All rights reserved.

Blog Posting: Monday, 4/28/08: How to Make 20% by Getting WIREd

I show two charts of Encore Wire (WIRE), one on the weekly scale and the other on the daily. Price formed a rounding bottom, outlined by the green line. Rounding bottoms are not the easiest chart patterns to identify because the turn is slow, long, and you are searching for it midway through development. The weekly scale makes identification easier, so try that. Look for a graceful turn, supported on the bottom by a congestion zone. I show WIRE on the weekly chart in the bottom figure. See how graceful the rounding turn looks.

On the daily chart, notice the abrupt move up from A to B with price at C returning back to near the launch price of A. This brief move up (forming a double bottom, really) is common for rounding bottoms after the stock passes the midpoint. If you see this behavior, you can buy in with confidence near C. It does not always occur but when price sinks from B to C, it is no time to panic. It should find support at the bottom of the turn. And if not, then a stop placed below support will help limit the loss.

I bought the stock with a buy stop at B, when price moved above the congestion zone. If you cover up the right part of the chart after B, then you can see how I might think that price would continue moving up in a rounding turn. The brief climb to H I thought was the common bump up that I expected (instead of the A B C move).

My buy stop was at 17.73 and the order filled at 17.72. On the buy day, price peaked at 17.93 and in the coming days, the stock plummeted like a skydiver jumping off a cliff, bouncing off the rocks along the way down. The company serves the home building industry, which is weak, and that made me nervous as price dropped. Low priced stocks tend to be more volatile than high priced ones, so I hung in there. I saw the long support zone setup by the rounding bottom and hoped that price would find support at 15 or above. I set my stop at 15.16, or 14.4% down from the buy price. At C, I came within 3 cents of being stopped out.

After bottoming at C, the skydiver began climbing back up the mountain. Last Wednesday, the company announced earnings after the close of trading. I read the announcement and thought that it sounded positive, but anything can happen to price; the market decides whether or not it is better than expected. The gap up shows its conclusion.

I happened to be adjusting my stops online just after the market opened and saw the stock was up dramatically. I thought about it and decided to sell, receiving a fill at 22. The reason for selling is I believe that price will retrace some of the gain to D, but how far price drops is anyone’s guess. After the retrace, I expect the stock to climb again to E where it should run into overhead resistance setup by the flat tops at G, but it could stop earlier (anywhere from 24 to 27). Then it should form a handle, F, a congestion region to the right of the cup lip. After that, expect price to move up, but that is well into the future. In short, I sold because I did not want to give back my hard earned gains in this volatile market. As the saying says, if the market gives you a gift, take it. I made 24% in about 2 months.

How can you duplicate this trade in other stocks and earn over 20%? Here’s what to look for.

• Find a developing rounding bottom or cup with handle pattern. Try the weekly scale for easier identification.
• Buy near the bottom of the cup, if possible.
• Expect a bump up somewhere after the mid point, but it does not always occur. See rounding bottoms for more details. For a lower entry price, buy into the stock after the bump returns price back to near the launch price. Often price will stop just above the launch price.
• Place a stop below the bottom of the cup or other support region. Move it up as price rises.
• Look for overhead resistance that would form the right cup lip and sell when price nears or reaches it.
• Do not expect a handle to form and price to continue rising after the right cup lip. It may not.
• Price may form a descending scallop, so watch for that to occur and trade appropriately.

Here are some stocks forming rounding bottoms. Some are in the early stages of development and may not be rounding turns at all. Others, like WIRE, are already well underway. Also, Eagle Materials (EXP) formed one from July 2007 to mid October 2007 and then price died. It is worth a closer look just to see what a failure looks like.

Finding patterns more recent than 01/25/2008.

Industry: Human Resources

Industry RS rank: 25 out of 45

Stock RS rank: 489 out of 548

Latest close as of 04/25/2008: $25.91

1 Month average volatility: $1.02. Volatility based stop: $23.46 or 9.5% below the close.

Change year to date: -8.38%

Volume: 226,300 shares

3 month average volume: 285,095 shares

 

Chart pattern: Rounding bottom continuation pattern from 10/31/2007 to 04/25/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Computers and Peripherals

Industry RS rank: 37 out of 45

Stock RS rank: 277 out of 548

Latest close as of 04/25/2008: $169.73

1 Month average volatility: $5.09. Volatility based stop: $156.24 or 8.0% below the close.

Change year to date: -14.31%

Volume: 35,445,400 shares

3 month average volume: 41,958,485 shares

 

Chart pattern: Rounding bottom continuation pattern from 01/14/2008 to 04/25/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Retail Building Supply

Industry RS rank: 14 out of 45

Stock RS rank: 40 out of 548

Latest close as of 04/25/2008: $11.29

1 Month average volatility: $0.44. Volatility based stop: $10.18 or 9.9% below the close.

Change year to date: 34.09%

Volume: 881,900 shares

3 month average volume: 717,857 shares

 

Chart pattern: Rounding bottom continuation pattern from 05/30/2007 to 04/25/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Human Resources

Industry RS rank: 25 out of 45

Stock RS rank: 179 out of 548

Latest close as of 04/25/2008: $26.89

1 Month average volatility: $0.91. Volatility based stop: $23.80 or 11.5% below the close.

Change year to date: 10.84%

Volume: 157,000 shares

3 month average volume: 134,645 shares

 

Chart pattern: Rounding bottom continuation pattern from 12/24/2007 to 02/28/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Household Products

Industry RS rank: 17 out of 45

Stock RS rank: 316 out of 548

Latest close as of 04/25/2008: $54.94

1 Month average volatility: $0.79. Volatility based stop: $52.71 or 4.1% below the close.

Change year to date: -15.70%

Volume: 1,045,100 shares

3 month average volume: 1,511,677 shares

 

Chart pattern: Rounding bottom continuation pattern from 12/26/2007 to 04/25/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Metals and Mining (Div.)

Industry RS rank: 15 out of 45

Stock RS rank: 106 out of 548

Latest close as of 04/25/2008: $23.10

1 Month average volatility: $0.76. Volatility based stop: $21.30 or 7.8% below the close.

Change year to date: 45.10%

Volume: 621,500 shares

3 month average volume: 459,018 shares

 

Chart pattern: Rounding bottom continuation pattern from 10/02/2007 to 04/17/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Building Materials

Industry RS rank: 26 out of 45

Stock RS rank: 503 out of 548

Latest close as of 04/25/2008: $5.24

1 Month average volatility: $0.15. Volatility based stop: $4.90 or 6.5% below the close.

Change year to date: -17.48%

Volume: 7,800 shares

This security may be thinly traded (less than 100,000 shares)!

 

Chart pattern: Rounding bottom continuation pattern from 10/22/2007 to 04/25/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Industry: Medical Supplies

Industry RS rank: 29 out of 45

Stock RS rank: 517 out of 548

Latest close as of 04/25/2008: $13.37

1 Month average volatility: $0.52. Volatility based stop: $12.05 or 9.9% below the close.

Change year to date: -12.73%

Volume: 191,400 shares

3 month average volume: 429,158 shares

 

Chart pattern: Rounding bottom continuation pattern from 10/10/2007 to 04/25/2008

Performance rank: 5 out of 23.

Breakout is upward 100% of the time.

Average rise: 43%.

Break-even failure rate: 5%.

Throwbacks occur 40% of the time.

Price meets the measure rule target 57% of the time.

Aftermath

The chart shows what happened to the stock since I sold. Price moved up to a new high and then has eased lower, along with the general stock market. As I write this in early July 2008, price has reached a low of 20.33 in late June, or about 7.5% below the sell price of 22.