Bulkowski's Tribune (TRB) Quiz

Look for the following chart patterns (If you find others, great!): 2 broadening tops, descending triangle, symmetrical triangle, right-angled and descending broadening formation, and an inverted and ascending scallop.

I show the descending triangle in green because Patternz (my computer program) loves it but I don’t (it looks to cut off a rounding turn). Price has closed above the broadening formation on the right.

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 1 (buy?): Buy. The partial decline correctly predicts an upward breakout 75% of the time in a bull market.

Answer 2 (target?): Use the measure rule, which is the pattern height added to the breakout price. The top trendline is at 47.99 and the low is at 44.28 for a height of 3.71. Add this to the price of the top trendline and the target becomes 51.70. Price reaches the target 65% of the time. Thus, consider multiplying the height by 65% before adding it to the top trendline price. That gives a closer target of 50.40.

Answer 3 (stop?): 2x Volatility is $1.24, so a stop placed 3% down or 46.63 would keep you away from being stopped out on normal volatility. That’s a bit close for me, so I’d place it below the minor low at A, shown in the chart above, 45.55.

Price moved up then consolidated in a rectangle top.

Question: Why should you sell the stock now, or should you?

A complex head-and-shoulders top forms. When price closes below the neckline, a line drawn connecting the armpits (the valleys between the shoulders and heads), it signals a sale. Price drops from a breakout price of 48.84 to a recent low of 28.40 (occurred on 2/1/2006 not shown).

Did price reach either the near (50.40) or farther away (51.70) targets? Yes. The first came as price exited the rectangle, moving up, and the second was reached when price formed the left shoulder.