Bulkowski's Family Dollar Trading Quiz

Toward the end of 2004, I fell in love with Big W chart patterns. Big Ws usually show double bottoms at the bottom of a steep downtrend. The theory is that the right side will mirror the decline on the left. It might not be as steep but it's the length of the rise that can be tasty. I just look for a tall left side with little congestion along the way lower as two keys to this pattern.

Price has pushed above (but not closed above) the confirmation price, the highest high between the two bottoms.

The chart shows lower lows but the indicator shows higher lows. It's bullish divergence because price usually follows the indicator, higher in this case.

Because this is an actual trade, here's my [edited for space] notebook entry. "Date: 10/13/05. Buy stop at 21.70, a penny above the confirmation price of 21.69. Volatility stop at 19.33 would work for a 10.9% loss, which is on the high side. Because the market is trending down, using a stop is a smart play. Upside target: 25.50 to 26 for a Big W rise, the site of overhead resistance in July. [I chose the upside target because that's near where the Big W starts, also a position of likely resistance.]

"Buy reason: Adam & Eve double bottom. The company has been hit (22 stores closed by Katrina), so revenues will be down. Earnings came in a few days ago. Book score +2 [That's a reference to my book, Trading Classic Chart Patterns on how to score a chart pattern for performance].

"10/14/05: The buy stop triggered today. filled at 21.70 to 21.71."

From my notebook: "MACD [moving average convergence/divergence] and RSI [relative strength index] have bullish divergence with the stock."

This is the MACD histogram. It also shows higher lows while price is making lower lows.

More from my notebook: "10/17/05. Stop placed at 20.32. This is a volatility stop because one placed below the double bottom low was too far away and the stock is up this morning. It would have to fall 6% to trigger it. I used the low on 10/14/05 at 21.13 - 0.81 [current volatility] to get 20.32."

I bought the stock a second time as the chart shows. It also shows the stop price, in green."

From my notebook: "Bought at 22.78 on 10/21/05, market open. Stop: 20.32. Upside target: 25.50 to 26. Future S&P direction (guess): Down for a few days then rebound. Buy reason: Good upside breakout from the double bottom especially coming on a day when the Dow was down 133 points. I wanted to add more to my position because I think this will Big W move up to 25.50 to 26. I don't particularly like the company or its prospects but I do think the Dow will recover tomorrow and help keep this stock moving up."

The horizontal red lines show the approximate start dates and price level of the stops as I raised them.

"11/28/05: The stock has closed lower 4 days in a row, so I expect a rebound despite breaking out downward from the diamond top. I hope price will bounce off the up-sloping trendline drawn from the Sept bottom upward. This still has upward potential, so it's worth holding."

"Date sold: 12/9/05. Sold at: 22.33, the stop price. I raised the stop because I felt a downward breakout from the descending triangle would mean a giveback of any gains."

When price made a new high, I raised the stop. I moved up the stop to the base of the descending triangle on the belief that if price pierced the lower trendline boundary, it would continue lower. It did but only for a few days before moving up smartly.

I made a massive profit of about 1% on the trade. Oh well. The scoring system was correct. Price reached the median rise of 27.37 on the last bar shown on the chart.