Bulkowski's Watsco (WSO) Quiz

Look for the following chart patterns (If you find others, great!): a wide descending triangle, a complex head-and-shoulders top, 2 head-and-shoulders bottoms and a triple bottom.

The descending triangle is the huge chart pattern that fills most of the screen. A head-and-shoulders bottom (HSB) is the one on the far right. If you wait for price to close above the neckline, it might take forever for that to happen. Instead, use a close above the right armpit as the buy signal. The HSB chart pattern shows such a case (see red line A).

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 because of the upward breakout.

Answer 2 (target?): You can use the measure rule for head-and-shoulder bottoms or look for overhead resistance. Of the two, resistance is the more important.

I show the price target as red lines constructed joining what I feel are zones of overhead resistance.

Answer 3 (stop?): The green line connecting the three bottoms of the triple bottom in Sept would make a good support zone. Place a stop below the green line, probably at a price slightly below the lower of the two shoulders (LS, RS).

Overhead resistance: I did reasonably well with the lowest circle in April. Price stalled moving higher in the middle circle and dropped below the lower resistance line while in the highest circle, price couldn't top the higher red line without first dropping back to base camp beneath the lower red line and then trying once more for the summit.

On the hard right edge of the chart, as it's called, price has been trending down for three days in a row.

Question: Do you sell?

If you chose to sell, that would be a mistake. The green trendline says all is well. Price dropped from 22.65 to a low of 22.04, not much to worry about. However, price has pierced the up-sloping green line in May 2004.

Question: Do you sell now?

The stock dropped from a close of 26.92 to a low of 25.19 before starting to recover. Although the chart does not show it, the stock made a new high of 67.30. Selling this holding would have been a mistake.