Bulkowski's Frontier Airlines (FRNT 2) Trading Quiz

What chart patterns can you find? Look for the following (if you find others, great!): rectangle bottom, high and tight flag, inverted and descending scallop, pennant, descending triangle, head-and-shoulders bottom.

The high and tight flag is circled in green, but the flagpole in blue to the left of it shows the price rise from 6 and change to 14+ where the flag is. The head-and-shoulders (H&S) bottom appears after a long decline that starts above point A in red beneath the scallop. If you step back across the room and look at the picture from A downward, the chart looks like a Big W (but alcohol may need to be involved) with the H&S bottom forming the reversal instead of the usual double bottom. Could price climb back up to point A? Price has closed above the down-sloping neckline of the H&S bottom.

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

Answer 2 (target?): The green horizontal lines show what I think is overhead resistance, but then I picked this H&S chart pattern for a reason. I know what's coming. Nevertheless, the block of congestion in August (red circle) with a rise in volume looks scary but I think it's close enough that price can push its way through. If you look at price from the October low, the head is at $4, so a climb to 8 would make it a high and tight flag. Price might pause there before continuing higher. Coupled with the long decline, price might make a quick rise back up to the Big W top at A. There's resistance at the pennant, which I show as another green line. If this were my stock and I wanted to buy, I would guess that price would climb to the old high at the left armpit of the H&S, 8.40, with a continuing rise to the pennant, maybe struggling at the round number 10 (site of resistance in October 2001). Notice the decline from the close at 12.15 on 9/10/2001 to the low of 6.25 when the stock opened on 9/17, a week after the terrorist attack of 9/11 (the highest volume spike on the chart).

You can always use the height of the H&S pattern to determine the target price. The head low is at 4, and the neckline directly above is at 7.65 for a difference of 3.65. Add this to the point where price pierces the neckline, 6.60 to get a target of 10.25. Price hits the target 71% of the time. To be more conservative in your target, multiply the height by 71% to get 2.59 and add this to the breakout price for a new target of 9.19. I show the approximate location in red on the chart.

Answer 3 (stop?): Volatility is $0.79 so a stop no closer than the intraday low of 6.67 - 0.79 = 5.88 would work, but low priced stocks tend to be more volatile, so you might want a lower stop. I think point B on the above chart would work well as a stop location. It's located below a support region that is a solid block of price movement between RS and B (blue circle). At a price of 5.27, it's below the volatility stop of 5.88. From the day's close, it means a potential loss of 21%. Ouch! That's much too high. The volatility stop at 5.88 represents a loss of 12%. That's closer but it's still high and I think risky. Finding a proper stop placement in these low priced issues is sometimes difficult.

To answer the question of where to place the stop, I'd compromise. Using a Fibonacci retrace of the move up from B, I'd place a stop below the 62% retrace value of 5.83. That is just below the volatility stop of 5.88 and below the 62% Fib line, so that would be my choice.

As the chart shows, price climbed to the resistance level near the top of the left shoulder ($8) before rounding over and throwing back to the breakout. Price continued down, stopping out the trade for a large loss and moving lower to bottom at 3.51. From the buy price, assuming you got in at the close the day after the breakout, 7.42, the decline was 53%. If you didn't place a stop, that's the paper loss you would be looking at.

Notice that once price bottomed it moved up, joining the Big W high at 17.50 almost exactly.