Bulkowski's Williams-Sonoma (WSM) Quiz

Look for the following chart patterns (If you find others, great!): 2 head-and-shoulders tops, 2 head-and-shoulders bottoms, broadening pattern.

Price has begun moving up after touching the bottom of the broadening bottom for the third time. I don’t care for broadening patterns because I find they fail often and are hard to trade. However, if you can recognize one before the third bottom touch, then buy after price begins moving up after touch 3 and hope for an upward breakout.

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 third touch is often a good time to buy. Keep an eye out for a partial rise which may predict a downward breakout (it’s correct 53% of the time).

Answer 2 (target?): Compute the height of the pattern from highest peak to lowest valley: 37.49 – 32.75 for a height of 4.74. Add this to the highest peak to get a target of 42.23. Price reaches the target 65% of the time. Consider multiplying the height by 65% to get a closer, more realistic target.

Answer 3 (stop?): For a stop, place it below the lowest valley. In this case, that would be below 32.75. Be sure to check volatility to make sure the stop is not too close.

Price moved up nicely from the third touch of the broadening bottom and formed a roof pattern at the old high.

Question: Do you buy, sell, short, or avoid trading this stock?

I circled in red a congestion region that has a downward breakout. It’s a small chart pattern called a shark-32. A shark-32 pattern is a 3-bar pattern with lower highs and higher lows.

The shark-32 appears in the circle as the last 3 days before the breakout. It signals caution. In this example, it warned of a trend change and a time to sell.