Bulkowski's Alaska Air (4) Trading Quiz

What chart patterns can you find? Look for the following: descending triangle, 2 head-and-shoulders bottoms, double top, 2 falling wedges, and a broadening formation, right-angled and ascending.

Price has pierced the neckline of the head-and-shoulders bottom and closed above it.

Answer 1 (Buy?): Buy because of the upward breakout.

Answer 2 (Target?): Use the measure rule and compute the height of the pattern from the head low (see the April pattern, not the October Head-and-shoulders top) to the neckline directly above. That's 17.70 - 15.28 or 2.42. Add this to the price where it pierces the neckline (16.90) to get a target price of 19.32. Price reaches the target 71% of the time, so look for overhead resistance that might stop an advance. From looking at the chart, I'd say the two shoulder lows from the October head-and-shoulders might be a problem. I show this as a horizontal line that rests just above the broadening formation in Feb-March '03.

Answer 3 (stop?): Volatility is 1.07, so a stop no closer than 15.63 (the most recent intraday low of 16.70 - 1.07) would work. That would place the stop below the right shoulder.

The stock moved up after the head-and-shoulders bottom eventually forming a head-and-shoulders top. Question: If you own the stock, what do you do now?

Answer: Sell. Since price has run up in a straight-line run, it might duplicate that on the downhill decline - a straight line run that takes price down quickly, bottoming at 24+. That's where I see a good support zone. I show it as a horizontal line in the chart. Measure the height of the head-and-shoulders to project a downward price target. That gives a 22.14 target by my calculations. From the 27.25 breakout price, that's a decline of 19% and that's a loss you don't want to be a part of.

As you can see, price pulled back to the head-and-shoulders top and almost climbed above the right shoulder top before resuming the downtrend. The horizontal blue line supported price in December '03 and acted as resistance in June '04. It caused price to stall in Sept-October 2004. Also note that the price didn't decline in a straight-line run, mirroring the move from the August low. Go figure.