Bulkowski's Russell (RML) Trading Quiz

What chart patterns can you find? Look for the following (if you find others, great!): head-and-shoulders bottom, 4 symmetrical triangles, inverted and descending scallop, and inverted and ascending scallop.

The head-and-shoulders bottom has broken out upward when it closed above the neckline.

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

Answer 2 (target?): Compute the height of the head-and-shoulders bottom from the head low (16.22) to the neckline (17.21), measured vertically and add it to the price where the stock crosses the neckline (16.89). That gives a target of 17.88. Price hits the target 71% of the time so be conservative. Look for overhead resistance that would pose a problem for the stock continuing to rise.

Answer 3 (stop?): Since this is such a small pattern, place a stop below the head, call it 16.17. That gives a potential loss of about 4%. Volatility is 59 cents, so the stop is far enough away that you won't likely be stopped out on normal price fluctuation. See my website "stop placement" if a volatility stop is new to you. The score according to my Trading Classic Chart Patterns book rates the head-and-shoulders bottom a -3, meaning the probability of hitting the 21.96 median price target is small.

After the head-and-shoulders in October 2004, the stock has climbed and formed an Adam & Adam double top, confirmed when price closed below the low between the two tops (the last price bar on the right of the chart).

Answer 1 (buy?): Sell an existing holding and consider shorting the stock. If you decide to short the stock, be aware that price may rebound at TL 2, a trendline connecting the lows and forming a right-angled and descending broadening chart pattern. If this were my trade, I'd avoid shorting the stock based on what I see and what I think is a limited downside move due to underlying support.

Answer 2 (sell sooner?): Use the sell trendline. When price closes below the trendline, sell.

You can see that price did bounce off the TL 2 trendline before forming a partial rise (as part of the right-angled and descending broadening formation, the yellow line and TL 2) and staging a downward breakout. Price eventually recovered and formed an Adam & Adam top at 21.84 (AA, far right on chart), just pennies below the book score median rise of 21.96. Price failed to meet the target before tumbling more than 20%, as predicted, but it was a near miss.