Bulkowski's Public Service Enterprise Group Trading Quiz

The Eve & Eve double bottom appears beginning in August 2003. If you constructed a descending triangle out of this, you would be incorrect as the inset shows. There is too much white space in the pattern for it to be a descending triangle, and the two bottoms don't line up either (but that's a small complaint). I put the descending triangle in the hint just to throw you off. Don't try to make a pattern where none exists. The chart doesn't contain a descending triangle.

The pennant is larger than I like to see but it does have a flagpole leading down to it, so it's fine. The Adam & Eve double bottom (AEDB) is in July 2004.

Here's my notebook entry for the trade.

Date: 8/9/04. Filled at: 40.61. Stop: 38. Upside target: 50.40 by scoring system. Future market direction (guess): Unknown. Utility index may double top and tumble. It's at the left peak high.

Buy reason: AEDB after throwback. Interest rates are set to rise tomorrow 0.25 points, so that's a negative. This looks like it has bottomed and utilities are the only thing going up in this market (general, S&P market). Yield is 5.4%

This is a picture of the Dow Jones Utility average on the day I bought PEG. Peaks 1 and 3 top out near the same price level. Peak 2 is slightly higher than 3. That's okay providing price continues rising. When I mentioned a double top forming, it looked like I was talking about peaks 1 and 2, not 2 and 3, but does it matter?

Price has reached the resistance level of the top of the Big W and has started down. The FED raised interest rates by 0.25%. The reason I bought the stock was because it was a utility (think dividends) and utilities were moving up. Nevertheless, if a stock is going to tumble, it's best to sell. If the stock is going to rise, then hold on. What's going to happen now?

Question: To put it another way, if you own this stock, do you sell, buy more, or hold on?

I decided to hold on. Price gapped lower at point 1 (early Sept), the day after the prior chart ended, but the drop stopped at a low of 40.68. Then it went on to make a new high after giving me a dividend (where the red exclamation point is in late Sept), followed by a lower low. Connecting the peaks and valleys formed a broadening top shown in blue. Price broke out upward from this chart pattern only to form an Eve & Eve double top (EEDT). It confirmed on the last price bar on the chart. Confirmation means price closed below the low posted between the two peaks. The double top says price is going down.

Question 1: Do you buy more, sell, or hold on?

Answer 1: How far is price likely to fall? My guess is the top of the big W, call it 42. If you use the full height of the double top projected downward, that would mean a decline to 41.81. That's the double top high at 45.29, valley low at 43.55, giving a height of 1.74. Subtracting this from the valley low gives a target of 41.81, close to the 42 target. That's a give back of just 4% below the valley low (43.55). I don't think that's a decline worth getting excited about. Besides, I'm in the stock to collect the dividend. My scoring system says there's a slim chance that price will drop to 37.07, the median decline. That's a potential decline of 14.8%, and that is large enough to pay attention to.

Surprise! A takeover offer valued at 52.74 sent the stock soaring, peaking just over 52 as you can see (remember my book scored a median target of 50.40, which turned out to be a good call). The falling wedge in Nov-Dec is not drawn correctly by my computer. The top trendline should be steeper, touching the top spike in early December, giving two touches of the top trendline and just two below. Wedges require 5 touches, but I ignored that in this case for some reason. I really don't like the look of this wedge either...so I removed it from my system. Anyway, price has formed a symmetrical triangle. I collected another dividend in late December (the red exclamation point) below the "Div" word in blue.

A utility taking over another utility (as is happening here) will take a year to close and the authorities can block it. In the meantime, anything can happen. If the Feds do block it, the stock will tumble, probably declining to the low 40s.

Question: Knowing that a quick decline often follows a quick rise, do you sell, buy more, or hold on?

Answer: If the symmetrical triangle (the last pattern on the chart) were to breakout downward, then consider selling. A downward breakout might suggest trouble with the takeover offer and price might tumble dramatically. If the triangle breaks out upward then hold on for additional gains. Another suitor might come in and force a bidding contest (but that's unlikely).

As you can see in the above chart, price broke out upward. On March 5, 2005, the stock hit a new high of 56.23, well above the takeover offer of 52.74. There is no news to account for the rising price.

Question: What do you do now? Do you hold, sell, or buy more?

Answer: Price could continue to rise but why take the chance? I placed a stop at 53.33, just below support at 53.50 (and below the knot of support formed a week before the right price high). A stop will allow price to climb but if it doesn't, I'm protected.

Date: 3/22/05. Filled at: 53.30.

Sell reason: hit stop as FED raises interest rates.

The red "S" in March shows where I sold the stock. I collected another dividend posted before I sold. The stock has continued to climb, reaching a high of 65.60 yesterday (Thursday). That's well above the takeover offer of 52.74. I still don't know why the stock is so high, but utilities have done well in this market. Including dividends, I made just over 35%. And that's in a stodgy utility stock!