Bulkowski's RIG Industries (RIG) Trading Quiz

What chart patterns can you find? Look for the following (if you find others, great!): 3 ascending broadening wedges, broadening formation right-angled and ascending, ascending triangle, 2 head-and-shoulders tops.

Price has looped up then back down and formed a right shoulder, touching the neckline or the bottom trendline of a broadening wedge in April.

Answer 0 (down breakout?): A partial rise that forms the right shoulder correctly predicts a downward breakout 60% of the time in ascending broadening wedges.

Answer 1 (buy?): If the breakout is downward, short the stock or sell a long holding (providing you expect a decline large enough to profit from).

Answer 2 (target?): You can compute the height of the head-and-shoulders top from head to neckline directly below then project the result downward from the location where price pierces the neckline (a line drawn along the armpits. I show the neckline as the bottom blue trendline). Alternatively, the lowest low in the broadening formation becomes the target. In this case, look at underlying support setup by the congestion in January as a likely reversal point. I circled that in the chart.

Answer 3 (stop?): A stop above the right shoulder top would work well in this situation. Volatility says that's much too close. The vol stop says to place it at 53.31 or 11.6% above the current close. 2x Vol is 3.77, so this is a very volatile stock.

I'd probably go with the vol stop setting instead of the right shoulder, just to be safe. The right shoulder of the head-and-shoulders is also the partial rise pointed to by the red line.

Price has rebounded.

The fake upward breakout from the ascending triangle is one reason why I dislike them (See August-Sept). If you went long, you would likely have been stopped out for a loss when it busted and broke out downward.

The ascending broadening wedge in February predicted a downward breakout. How? On page 184 of my Encyclopedia of Chart Patterns, 3rd Edition, it shows a slim majority (52%) of these patterns have downward breakouts. Yes, it's about random but it is an edge. Sometimes all you need is an edge.