Bulkowski's Apache (1) Trading Quiz

What chart patterns can you find? Look for the following: ascending triangle, descending triangle, symmetrical triangle, broadening formation right-angled and descending (or a broadening top), head-and shoulders top, complex head-and shoulders bottom, big W.

The symmetrical triangle has broken out downward when price closed below the lower trendline.

Answer 1 (Buy?): The red line shows what I feel is a robust support zone. If price were to bounce off that line and trend up, would the trade be worth taking? The breakout price is 31.70 and the red line is at about 29, so that's a decline of 8.5%. Price could drop below this and that's always a possibility, but in a bull market, going short I feel is always more risky than going long. I wouldn't short it, but if I owned the stock, I wouldn't sell it either. Why? Because this looks like a top trap. I'll explain that later.

The green trendline also shows a support region but red and green zones are not additive. You won't get twice as much support where they join. However, research shows that the apex of a triangle is an area of support or resistance. Price will often turn there but the turn might not mean the new trend direction will last.

What's the answer to the question about trading this one? I think this is a bullish top trap. Price has to push down through support (any price above the red line) before a meaningful decline takes place. It's more likely that the stock may drop a bit, but then rise. See the link for more information.

Answer 2 (Target?): I would say 29 (price of the red line) looks good as the maximum decline target. The intersection of the red and green lines may be the date when price turns upward.

Answer 3 (stop?): If you were to short this one, where's the stop price? There's no overhead resistance to pin a stop, but the top of the symmetrical triangle is a good stop location. If price closes above the symmetrical triangle then it's a good bet price will continue rising. The high is at 34.60 and the current close at 31.40, so that would mean a potential loss of 10%. That's a bit high for a stop loss. You could place it at A, above the minor high and above the tight congestion at B. The high at A is 33.63 for a potential loss of 7%, so that's where I would place it.

Price didn't decline to the red support line but bottomed much higher. Price pulled back and then continued up, rising about 50% from 31 to 46. The triangle busted and those often, but not always, mean a large move in the new breakout direction. They are worth searching for. A busted pattern is one that breaks out downward, moves less than 10% and then rebounds, breaking out the other side of the triangle.

In this example, going short would have been a mistake. If you were swing trading this one (and already owned the stock), I would have sold on the adverse breakout (that is, a downward breakout) from the symmetrical triangle. For swingers, when you get a sell signal (a close below the triangle trendline), then sell. If price makes a large move up, so what? You don't own it anymore so it should cease to matter. That's how I treat any stock that rebounds after I sell. It happens.