Bulkowski's Campbell Soup Trading Quiz

What chart patterns can you find? Look for the following: Symmetrical triangle, ascending triangle, diamond top, descending broadening wedge, broadening bottom, triple bottom.

My computer drew the blue lines so they are not as accurate as hand drawn ones. Forgive the appearance. The ascending triangle has price closing above the top trendline.

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

Answer 2 (target?): Set the price target to near the top of the broadening bottom (28.13) or the diamond top at 28.70 (both are not shown on this chart. See the prior chart). Since two tops appear near 28 (Sept 2004 and April 2005), price may stall there. You can also use the measure rule for ascending triangles. Compute the height from the top trendline to the lowest low in the pattern and add the result to the top trendline. That would give a target of 28.77, very close to the highest peak on the prior chart (the diamond top).

Answer 3 (stop?): A good stop point would be just below the knot of support at 26.70, shown as a circle. That may be a bit close since it allows a decline of just 1.7% before hitting the stop. Volatility is 61 cents, meaning that a stop should be placed no closer than 26.56. Since this means lowering the stop from 26.70, I would use a Fibonacci retrace of the swing from the third bottom of the triple bottom to the high at the current price and place it at 25.73, which is just below the 62% retrace of that up-swing.

The above chart shows that price climbed after the breakout from the ascending triangle, but not before touching the bottom (26.68, A) of the knot I mentioned as a support level. Price recovered and peaked near 31, twice, forming what appears to be an unconfirmed double top (EE).

Question: Do you sell, hold on, or buy more?

The correct answer was to hold onto the stock because it continued moving up. In 65% of the cases I looked at in a bull market, price continued rising without confirming the double top as a valid chart pattern. In other words, price did not close below the lowest valley between the two peaks 65% of the time before making a new high like that shown in the chart.