Bulkowski's Teleflex 2 (TFX) Quiz

Look for the following chart patterns (If you find others, great!): Diamond bottom, head-and-shoulders bottom, inverted and ascending scallop, Eve & Eve double top.

Price has closed above the inverted and ascending scallop in November.

Question 0: How do you know the rapid decline from C to D is overextended (assuming you didn't know of any price movement after D)?

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?

Answer 0 (over extended decline?): Assuming you didn't see any additional price movement after D, the gap above D is likely an exhaustion gap. I'd expect it to close quickly, perhaps with a fast rebound. In this example, that's exactly what happened. Price retraced a portion of the decline.

Also, you can measure the height of the double top and subtract it from the lowest low between the two peaks. That gives a target of 44 – (50.98 – 44) or 37.02. Price hit bottom at 34, well below the target. Thus, the decline might be excessive. If this is a dead-cat bounce event pattern, then trading the stock is risky. Find out why the stock declined before taking a position.

Answer 1 (buy?): Let's ignore the possibility of a dead-cat bounce. Since price closed above the scallop top, that's the buy signal.

Answer 2 (target?): Use the measure rule to get a target. The scallop high is at 42.67, low: 34 for a height of 8.67. Added to the high gives a target of 51.34. Price reaches the target 64% of the time so consider multiplying the height by 64% to get a closer target. Check for overhead resistance before making a target selection.

Answer 3 (stop?): The right scallop low (D) at 39.20 is 9% below the current close and since it's below a congestion region (the top of the scallop), it represents a good location for a stop. Current 2x volatility is $1.77, so a stop placed no closer than 40.30 (6.4% below the close) would help keep you from being stopped out on normal volatility. Thus, I'd feel safe with the 39.20 stop or even move it to below 40, like 39.93 (keep it away from round numbers like 40, 45 and so on).

The above chart shows what happened after the buy. Price ran into overhead resistance setup by the middle valley of the double top (orange line E) and threw back to the scallop breakout price, which happens 66% of the time, before soaring up to A. Price then stumbled to B, a decline from 48.25 to 43.60, or nearly 10%. Let's say you hung onto the stock. Price moved up then consolidated in a horizontal price movement starting in April. From C, price has made two successively higher lows and higher highs.

Question: Is it time to sell?

I show a sell trendline (green) that I would have used to determine whether it was time to sell or not. With price making a lower high at A (looking like the right shoulder of a head-and-shoulders top), that's a clue of a coming trend change. A close below the green trendline (drawn along the valleys which line up quite well), is further evidence of a downturn.

The sell location shows a pullback to the trendline and it gives the trader another opportunity to get out before the decline really begins. The stock dropped from the sell price 55.15 to a low of 33.82, or 39%.