Bulkowski's Big Lots Trading Quiz

What chart patterns can you find? Look for the following (if you find others, great!): Big W, head-and-shoulders top, head-and-shoulders bottom, 2 rising wedges, 2 inverted and ascending scallops.

The rising wedge (far right on the chart) is usually a bearish chart pattern, so the upward breakout - when price closes above the top trendline - seems unusual. How do you trade it?

Answer 1 (buy?): If you look at the bearish rising wedge as a busted pattern (the breakout is usually downward but it's upward in this example), then buy. But first, check for overhead resistance.

The two red lines are what I think are overhead resistance. I drew them by connecting the peaks, valleys, and congestion areas. The lower red line looks to be too close to the breakout to stop price. Breakouts usually push through nearby overhead resistance. Will it stop at the top trendline? That's the danger of trading a chart pattern that is NOT trading at the yearly high. There's always overhead resistance.

Answer 2 (target?): The stock might stall at the top trendline or continue on to the old high at 18 and form a double top.

Answer 3 (stop?): If you were to buy this stock, a stop placed below the lower wedge trendline would work. I show possible locations as points A-D. Point A looks too close. A quick down move would trigger a sale. B isn't much better. C and D seem to be far enough away to lend protection. Volatility is $0.50, meaning a stop place 50 cents below the low at 14.30 would work. The 14.30 value is the most recent intraday low price shown. That means point A is out but anything at B or below will work. On a percentage loss basis, B is at 9%, C is 11%, and D is 14.2%. That's one of the problems with low priced stocks. A meaningful stop loss point is often a high percentage away from the buy price.

Much to my surprise, the lower bar of overhead resistance stopped price on numerous occasions, forming a broadening chart pattern (right-angled and descending). Buying this stock would have been a mistake.