Bulkowski's Walmart (WMT) Quiz

Look for the following chart patterns (If you find others, great!): descending triangle, head-and-shoulders bottom, Adam & Adam double bottom, three falling peaks, broadening bottom, scallop.

Price has broken out downward from the descending triangle by closing below the bottom trendline. Suppose you own the stock.

Question 1: Do you sell this stock?

Before making a selling decision, evaluate how far price is likely to decline.

Above is the weekly chart. Price is at the bottom of the support zone as the red "Support" (the shorter one) line shows. If it can drop below that, then it might continue lower to "Support line 2." I drew this using the numerous price bottoms as guides along with the congestion zone in the circle.

Notice how price shoots upward in a straight-line run out of the circled region. I would be afraid that price will tumble back down in a similar manner, a quick decline. That's not always the case, but it worries me when I see such a pattern. What does the quick rise look like on the daily scale?

Here's the quick rise along with the 3 falling peaks highlighted for reference. The congestion zone formed by the diamond should prove to be a good support area because price looks packed together, tight.

The chart pattern busted when it broke out downward, reversed, and broke out upward [Note: I changed the definition of a busted pattern after I wrote this article. To bust a triangle, price has to close above the top of the chart pattern, not above the top trendline].

Question: If you didn't sell on the downward breakout, or even if you did, do you buy now?

Answer: Look for overhead resistance before making a buy decision.

I show the overhead resistance in red. I would have suspected that the stock returning to the bottom of the triangle was just a pullback. After a pullback completes, the stock drops 48% of the time. That's random but still a cause for concern. I would not have bought more and if I owned the stock for the very short-term (days to weeks), I'd have sold.

Notice the straight-line decline back to the support area I highlighted earlier as the red support line 2.