Bulkowski's Southwestern Energy (SWN) Trading Quiz

What chart patterns can you find? Look for the following (if you find others, great!): ascending broadening wedge, ascending triangle, symmetrical triangle, inverted and ascending scallop, rectangle top, complex head-and-shoulders bottom, right-angled and descending broadening formation.

The complex head-and-shoulders bottom (cHSB) has an upward breakout when price rises above the green neckline, a line joining the armpits. Most times, you’ll see a near horizontal neckline in cHSBs.

Question 1: Do you buy, short, or avoid trading this stock?

Question 2: If trading this one, what is the target price?

Question 3: If trading this one, what is the stop price?

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

Answer 2 (target?): Measure the height of the pattern from head low to the neckline directly above. The head low is at 13.07, the neckline is at 15.54 for a height of 2.47. Add the height to the breakout price to get the target. Breakout is at 15.48, the right shoulder high (which I use when the neckline slopes up). Thus, the target is 17.95. That’s a 16% rise, which seems doable. Price hits the target 71% of the time, which isn’t bad. For safety, you might want to multiply the height (2.47) times 71% = $1.75 and then add that to the breakout: 17.23. That gives a closer target and one more likely to be hit.

Answer 3 (stop?): 2x volatility is $1.01 so place a stop no closer than 14.55, or 13.1% away. That’s too far away, but as I look at the chart, since price gapped up, I would probably place it farther away, believe it or not. I’d use the right-most right shoulder low, at 14.13. Yes, that would place the stop about 16% away, but my fear would be price rounding over in an area gap, closing you out prematurely. This may be a case where you want to NOT buy the stock. Price is racing away from you. Tests show that if you can’t get in within 5% of the breakout price, then the chances increase that you’ll have a losing trade. Upon reflection, I’d skip this trade because you can’t get in at a good price and the stop is much too far away.

As you can see, price threw back to the neckline and rebounded, moving up in a straight-line run. The throwback would be a good time to enter in this example. Things started getting choppy from Oct to Jan as price moved horizontally. Premature upward and downward breakouts appear in the ascending triangle. Those tend to drive traders crazy. They get stopped out in both directions. Price eventually broke out upward from the ascending triangle, threw back, and continued lower.

Question: If you owned this stock, would it be time to sell?

The worst-case scenario is to have a stop placed below the chart pattern low (green line). Sell when price closes below it. The answer to the "time to sell?" question is yes, you’d sell. I’d also have a stop closer than the bottom of the chart pattern so I wouldn’t give back as much money. Perhaps extend the bottom triangle trendline upward and when price closes below the line, that’s the sell signal.

Alternatively, the apex of a triangle is both a turning point and a support area. If the stock closed below the triangle's apex, then sell. As price climbed, when it reached the day of the apex, expect a turn.

See this link for clarification. It would have worked well here (the signal would appear close to the second peak).