Thomas Bulkowski’s Trading Quiz

Bulkowski’s Trading Quiz One trader had a question about stop placement, so I thought a review would be a good idea. Since this took too long to put together, there’s no quiz today. Consider this chart.

You might want to print it out or just view it split screen. At the top of the right vertical scrollbar in Word, you’ll see a small rectangle just above the up arrow button. Pulling the small rectangle down allows you to split the screen so you can view a portion of the chart and review theses notes at the same time. Imagine that you bought the stock at the breakout from the pennant in July. Where would you place a stop? Since the pennant and most chart patterns offer support or resistance, placing a stop below the pennant at point 1 would work. Point 2 would be a choice for more volatile stocks but it’s farther away so you would incur a larger loss. The point is just below the horizontal price trend (shown by the horizontal Copyright © 2006 by Thomas N. Bulkowski. All rights reserved. Bulkowski’s Trading Quiz is prepared from information believed to be reliable but not guaranteed and does not purport to be complete. Opinions expressed are subject to revision without notification. The author(s) are not offering to buy or sell the securities or commodities discussed, but may have a position in them. All references to “Buy” or “Sell” or any related terms should not be construed as a recommendation that you should buy or sell. It’s just a form of expression. Past performance is no guarantee of future results. There is no warranty expressed or implied by the contents of this quiz. You agree to hold Thomas N. Bulkowski and other authors of Bulkowski’s Trading Quiz completely harmless as a result of reading or using this information.

line). Ignore the price scales for the moment (meaning that both stops are relatively far away on a percentage basis). Point 3 is a throwback. I always assume a throwback will happen. That’s when price returns to or nears the breakout price within 30 days and shows white space in the process. The white space rule is used to prevent a throwback label from being applied when price slides along the breakout price instead of moving up then curling back down. As price rises, raise the stop, but to where? When price at point 5 rises above the prior peak at 4, then raise the stop to 6, the prior valley low. This method doesn’t always work. Consider points 7, 8, and 9. Price at 8 (a new high) rises above point 7 (the prior high), so this would call for a stop at 9 (the prior low). The low at point 9 is at 9.88, and price closed at 15.03 at point 8. The stop would be 52% below the close. That’s huge. Try to keep your stops less than 15% away at the start of a trade and below 10% away as the trade progresses. Point 10 is a closer minor low, another choice for a stop. Point 10 bottoms at 12.16, but that’s still 24% away. Still too far below the current price. Another method is to use a Fibonacci retrace. That’s when price drops back between 38% and 62% of the prior rise. Look at points 3, 11, and 12 in the lower left of the price trend. Point 3 bottoms at 5.16, point 11 peaks at 7.19 and the retrace bottoms at point 12, at 6.03. The move from 3 to 11 is 2.03 points. The decline from peak 11 to bottom 12 measures 1.16. Thus, the retrace of 1.16 out of 2.03 points, or 57%. A stop placed at the 62% retrace of the move from 3 to 11 would have worked (I prefer a 62% retrace value as price most often reverses before reaching it). Point 3 is the swing low, point 11 is the swing high, and point 12 is the swing low. With my computer program, I just click on the swing low and high and it draws 3 parallel lines at the 38%, 50% and 62% retrace values. That way, I can place the stop as needed. Your program may have a similar feature. One last method is to use a volatility stop. Dump the daily price data into a spreadsheet and then calculate the difference between the intraday high and low – think of it as the daily price range. Place the result in a separate column then average the last month’s worth of data, about 21 values, to get the average daily price volatility. From there, multiply by 1.5 or 2 (testing shows that 2 results in better performance) to get a volatility reading. Let’s say the average price range is $1. Multiply it by 1.5 to get $1.50. I use the current day’s low and subtract $1.50 from it. A stop should not be any closer than $1.50 below the current low. If the stock has a low of 40, I would not put a stop closer than 38.50. A volatility stop would work well for Abgenix as price has zoomed upward. Also note that the scale is logarithmic not arithmetic. I prefer the log scales as it shows more detail when price makes a large move and trendline piercings will occur sooner, too. Finally, some brokerages have automated trailing stops. You set the dollar amount or percentage below the price and the stop is raised automatically as price moves intraday.

The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): rounding bottom, 3 diamonds, 3 rising valleys, pennant, and a wedge.

The pennant hasn’t shown any signs of a breakout. Price is near the top of the rounding bottom.

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?

The answers appear on the next page. Here’s my notebook entry for the trade. It provides the answers. “Date: 7/27/05 Filled at: 10.31 Stop: 9.27 or 10% Upside target: 11.24 (7/21) - 6.45 (4/27) for a height of 4.79 * 57% (percentage meeting price target) = 2.73 + 11.24 = 13.97. Future S&P direction (guess): Downward because of overhead resistance. Buy reason: Rounding turn. There is much support at 10.50 which the stock is struggling to breech. I think this will hold and the stock will tumble back to support at 10.30, so I place an order to buy at 10.31. Right now, the stock is rounding over, heading back down. It's at 10.43. News is that earnings were in-line, but the market didn't like it. The stock gapped open and I saw a small ascending triangle form but didn't act on it at 10.20 to 10.30. I missed my chance. I still believe in the stock. Once it pushes through this knot of resistance at 10-11, it could pop.”

This is the chart on 8/1/2005. The stock has closed above the pennant’s trendline boundary. The three Vs are the 3 rising valleys chart pattern. E and E is an unconfirmed Eve & Eve double bottom. TT is a triple top or maybe a head-and-shoulders. The E in April 2005 is part of an Eve & Adam double bottom, but the price difference between the two bottoms seems large. Question: If you didn’t buy before, do you now? My answer is on the next page. Here’s my notebook entry. “Date: 8/1/05 Filled at: Canceled before execution Stop: 9.91 Upside target: 15 Future S&P direction (guess): Down Buy reason: Rounding bottom. I like the way this stock is behaving. It shows a small knot of congestion (pennant) just after the breakout from a rounding bottom. I want to buy more if it continues to rise.” I don’t remember why I canceled the trade… Here’s additional notebook entries. “8/31/05 Stop raised to 9.91, below the 10 round number and below SAR setup by overhead prices. 9/6/05 Stop raised to 10.61, below 62% Fib retrace and just below the low of 10.65 on 8/31. I don't trust to put it closer. 9/7/05 Stop raised to 11.03, just below the 62% Fib retrace value and closer to today's close.”

The black dots show the date and price in which the stops were placed.

Question: Do you sell the stock after the sharp vertical move? Then next page shows what happened next.

Here’s my notebook entry. “9/21/05 I believe the stock is heading down so it's time to sell.” Question: Do you agree? The answer appears on the next page.

More notebook stuff: “9/22/05 I watched the stock throughout the day. It was up in the morning so I thought it would hang in there, but no! Tomorrow, I'll try to time it on the up swing. “Date: 9/23/05 Filled at: 11.41 Sell reason: The stock has started moving down and I waited too long to sell. Getting out was full of problems as I forgot to cancel my stop order before trying to sell. I didn't know that the order wouldn't go through. When the stock rebounded to a higher price, I put in a limit order to sell but it took too long and didn't take. Price tumbled before I changed it to a market order and dumped it. Next time, just dump the thing. Selling now allows me to exit with a tidy profit and buy back in if I see the stock rebounding.” The stock never climbed to the 13.97 target. The stock did rebound but made a lower high, a sign of trouble. When the general market tumbled in the last few days, the stock followed. I made 10.5% in 58 days, or 66% annualized. Now, wouldn’t that be nice? The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): scallop, diamond, 2 head-and-shoulders, broadening top, high and tight flag.

Price after the head-and-shoulders bottom in April has closed above the down-sloping blue neckline. 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?

The answers appear on the next page. Here’s my notebook entry for the trade. “4/23/04 I believe price will rise to 16 to 17, and, if lucky, push through to make new highs. Earnings are due a month from today, so that gives us room. Downside is 12.94, stop, for a loss of 12%. Filled at: 14.66 to 14.67 Buy/sell reason: Head-and-shoulders bottom upward breakout Mood: buoyant but rushed. Wanted to get this in before the close and it may be a hip shot. I'm depending on H&S to perform S&P direction, over pattern lifetime: Downward Future market direction (guess): Hard to tell. I expect market to rise for a few days until tagging earlier ascending triangle then declining, forming a large double top. Confidence? Will trade work? Yes. Confidence is high Stop: 12.94, or 12%. Placed 4/23/04 at 12.94. Upside target: 16-17

This is a picture of the general market, represented by the S&P 500. I show a descending, broadening wedge, a chart pattern I didn’t see when I took the ABGX trade. I show the green line as when price began forming the left shoulder of the head-and-shoulders bottom in ABGX. Price moved lower, as my notebook entry describes. The rise to 16-17 in ABGX would take price to the old high posted in February. How did the trade go? Look at what happened (next page).

The next trading day, price shot up as the above chart shows. It blew through my 16-17 target and topped out at 19.50, but closed much lower, at 17.70. Here’s what the Wall Street Journal had to say about the move the next day: "Small companies that are developing cancer treatments saw their shares soar after large-caps Genetech and OSI Pharmaceuticals reported positive data from a late-stage trial of Tarceva, a lung-cancer treatment." Question: Do you hold onto the stock for additional gains, sell, or buy more? The next page shows how I handled it.

Here’s my notebook. “Date: 4/27/04 Filled at: 18.308 Sell reason: stock jumped 3 points yesterday on hype. Mood: cautious. I expected the stock to give back almost all of its gains, but it was up this morning, coming down. A quick decline often follows a quick rise.” As you can see, I sold a day after the stock peaked and made 25%. Not bad for a 3 days of work. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 3 scallops, 2 triangles, and 1 broadening formation.

Notice that the September ascending scallop has price levels almost at the same price, suggesting the uptrend is near an end. Price tumbles soon after. The December scallop is more V-shaped than I like to see. The symmetrical triangle has an upward breakout when price closed above the top trendline in February 2005. 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?

The answers appear below and a chart on the next screen.

Answer 1: Buy. The stock is near the yearly high with an upward breakout, a good sign of additional gains. Answer 2: Compute the triangle height and add the height to the breakout price. The result will give you a target price which the stock reaches 66% of the time, so be conservative in your target. Answer 3: Volatility is $1.71, so a stop no closer than 77.58 would work well. That means placing a stop below the lowest valley in the chart pattern, which bottoms at 76.74. That would give a potential loss of 3.5%, which is great.

After the breakout, price threw back before gapping upward in February. It’s been mostly upward since then with only a diamond to give a breather to the run up. Then end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 ascending scallops, 1 broadening top, triangle.

Ascending scallop 1 isn’t drawn well by my computer as a rounded turn, but you get the idea. Notice that the right side of the pattern ends much higher than the left (at 76 versus 67.53). The scallop appears like the letter J. Look at ascending scallop 2. Notice any difference? The stock tops out at a price not much higher than on the right side of the pattern. Question 1: What does it mean when the right side of the scallop doesn’t rise much higher than the left? Question 2: Do you buy, sell, or short this stock? Question 3: What is your price target? Question 4: What is your stop price? Answers appear below. The next page shows what happened to price.

Answer 1: It signals a trend change, but it’s not a guarantee. However, you can see price already moving lower. Answer 2: Sell an existing holding for short-term traders or sell short. Answer 3: Assume price drops below the bottom of the scallop, confirming a downward breakout. The measure rule is the height of the pattern applied to the breakout. The high is at 80.48 directly below point A in the chart. The low is 73.70 for a height of 6.78. Since the measure rule works just 58% of the time in a bull market, multiply the height by 58% (3.93) and subtract it from the lowest low for a target of 69.76, matching the price level of point B. Answer 4: Volatility is high at 2.08, so you’d want to put your stop higher than 2.08 above the breakout (the lowest low). I show it as a horizontal line near the scallop bowl low. If this is too close, then you can always raise the stop to the left scallop rim high at 79.17.

Price reached a low above the highest volume spike on the chart, at a price of 64, below the target of 69.76. If you sold short at the scallop low and covered at the low on the chart, you would make 13%. That’s for a perfect trade without commissions. Chances are you’d be lucky to get away with half that profit. If you failed to cover, you can see what happened to price. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns: triple bottom, head-and-shoulders, scallop, 2 triangles, broadening pattern.

The head-and-shoulders appears as LS, head and RS. The triple bottom as 1, 2, and 3, marking the bottoms. Price has broken out of the triple bottom/ascending broadening pattern. 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?

The answers appear on the next few pages.

Here’s my notebook entry for the trade. “Date: 6/28/04 Filled at: 31.25 Stop: 28.37 placed 6/28/04 Upside target: 38.94, score of 0. Mood (will trade work? Bought too soon?): Not as confident as price dropped after I bought. I feel like I'm trading too often. Everything I buy is going up and that means a crash is coming. I'm overtrading just because I feel so good doing it. S&P direction over pattern lifetime: Lower but just barely Future market direction (guess): flat to down. S&P is reaching old highs and I expect overhead resistance to an upward move. If it does punch through, the rise might be swift. Buy reason: Triple bottom at yearly high with upside breakout. Strong base below. Other diversified chemicals are trending higher. I expect this to continue moving up.” I scored the triple bottom using my Trading Classic Chart Patterns book methodology. The score was 0 meaning the trade was neutral. Scores above 0 tend to meet or exceed the median rise; those below 0 tend to do poorly. When it’s 0, it’s a toss up as to whether the trade should be taken or not. Answer 3 (stop?): I placed the stop at 28.37, as I show in red on the chart. It’s an odd number to be beneath round number support zones (like 28.50) and it’s below the nearest minor low. If you look at the chart, you’ll see all green on the volume spikes for the last 5 days in a row. How much longer would price continue moving up? My handy dandy home brew program says that there’s just a 2% chance of price closing higher for a sixth day. That should have served as a warning, but I missed it.

Answer 2: I placed the target at 38.94. That’s the triple top high multiplied by the median rise of 26.65% I found for stocks with scores above 0. Answer 1: I bought the stock.

“6/30/04 Stop raised to 29.51” The stock closed higher the next day and the day after that, too, even though the price range narrowed. It formed what’s called a shark-32 pattern. Think of it as a small symmetrical triangle. I raised the stop on the day of the last price bar to the level shown above by the red line. See the next page for more fun.

Price has dropped from the buy date. Question: Do you make any changes? My answer appears on the next page.

Here’s my notebook entry for the sale. “Date: 7/22/04 Filled at: 29.50 Mood (sell too soon?): No. Sell reason: stopped out.” The stock hit my stop and sold exactly at the intraday low. As you can see, I sold at the bottom and price took off. This happens sometimes. By raising the stop, I narrowed the potential loss from 9.2% to 5.8%. As you can see, the stock met the predicted price rise of 38.94, suggested by the scoring system. If I sold at the price target the system suggested, I would have made almost 25%. If I sold it at the very peak, I would have made 30%. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): symmetrical triangle, broadening top, inverted and descending scallop, descending scallop, Adam & Adam double top, Eve & Eve double bottom, head-and-shoulders top, Big W, horn and pipe (both on the weekly scale so you can ignore them).

The red Qtr symbol in the upper right of the chart with the small red circle shows the release of quarterly earnings.

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?

The answers appear below and a chart on the next page.

Answer 1: The breakout from the earnings surprise was downward, suggesting a short sale. Since price has recovered, it’s best to stay away and not short. Price is near the yearly high, so you don’t want to short a stock making new highs but stick to one making new lows (as my research finds…the study is on my website somewhere, maybe in Studies or in the FAQ). I see no other reason to own this stock or trade it. Answers 2, 3 : Don’t trade this one, so the answer is moot.

The scaling is different so it may take a bit to adjust to the new chart, but the red vertical line shows (to the left) where the last chart ended and the new one began. Price continued moving up so a short would have cost you money, at least on paper. The head-and-shoulders top that formed was a much better indicator of price turning lower. When it confirmed then that was the time to short the stock, if you are bold or crazy enough to do that. With the cost of jet fuel what it is, that’s not a bad bet providing you covered near the October low. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Big W, double top and bottom, head-andshoulders, triangle, 2 scallops.

AADT is an Adam & Adam double top. The big W spans the EEDB and ends at the head of the H&S top. The symmetrical triangle shows an upward breakout. 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?

The answers appear below and a chart on the next page.

Answer 1: Buy because of the upward breakout. Answer 2: Measure the height of the triangle and add it to the breakout price. The result is the target and price reaches or exceeds the target 66% of the time, so consider multiplying the height by 66% and then adding it to the breakout price. The breakout price is the price at which the stock pierces one of the triangle trendlines. Answer 3: The bottom of the triangle is usually a good stop location and that also agrees with a volatility stop location. Here’s the details as of the day before the breakout: Volatility stop: $27.20 -8.4%. 2x volatility: $1.71 Minor low stop: 28.22 -5.0% on 03/21/2005

If you bought the stock, you’d have taken a loss. If you still held on as it declined, that would be a mistake. The day after the prior chart, price peaked at 31.40 and dropped to a low of 25.55, for a potential loss of 19%. Price did recover, but you should not have ridden out the decline. Overhead resistance at A formed a solid wall accompanied by high volume, a potent resistance level. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): triangle, 2 head-and-shoulders, double top, 2 wedges, and a broadening formation.

Price has pierced the neckline of the head-and-shoulders bottom and closed above it. 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?

The answers appear below and a chart on the next page.

Answer 1: Buy because of the upward breakout. Answer 2: Use the measure rule and compute the height of the pattern from the head low to the neckline directly above. That’s 17.70 - 15.28 or 2.42. Add this to the price where it pierces the neckline (16.90) to get a target price of 19.32. Price reaches the target 74% of the time, so look for overhead resistance that might stop an advance. From looking at the chart, I’d say the two shoulder lows from the October head-and-shoulders might be a problem. I show this as a horizontal line that rests just above the broadening formation in Feb-March ‘03. Answer 3: Volatility is 1.07, so a stop no closer than 15.63 (the most recent intraday low of 16.70 – 1.07) would work. That would place the stop below the right shoulder.

The stock moved up after the head-and-shoulders bottom eventually forming a head-and-shoulders top. Question: If you own the stock, what do you do now? The answer appears below and a chart on the next page.

Answer: Sell. Since price has run up in a straight-line run, it might duplicate that on the downhill decline – a straight-line run that takes price down quickly, bottoming at 24+. That’s where I see a good support zone. I show it as a horizontal line in the chart. Measure the height of the H&S to project a downward price target. That gives a 22.14 target by my calculations. From the 27.25 breakout price, that’s a decline of 19% and that’s a loss you don’t want to be a part of.

As you can see, price pulled back to the H&S top and almost climbed above the right shoulder top before resuming the downtrend. The horizontal blue line is the support zone I showed earlier. It supported price in December ‘03 and acted as resistance in June ’04 and caused price to stall in Sept-October 2004. Also note that the price didn’t decline in a straight-line run, mirroring the move from the August low. Go figure. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 diamonds, Eve & Adam double bottom, 4 broadening patterns of various types, and 3 scallops.

Price is rising after the scallop/EADB. 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?

Since this is based on an actual trade, my answers appear on the following pages. This is from my trade notebook. “I bought at 32.19, market order. The stock has completed a confirmed Eve & Adam double bottom coupled with an upside earnings surprise 4 days ago. The stock has moved higher but may have overhead resistance at 32-33, where it is now trading. I expect it to push through this region then post new highs. Oil prices are falling but OPEC is expected to tighten the spigot in coming weeks, putting upward pressure on fuel prices. Economy is slow but some predict it's bottoming. This airline is one of the few still profitable. Sell in the early Spring when the market for airline stocks usually goes soft (strong starting in the fall). Upside is 38, another mild resistance zone. Downside is 28, a prior support zone in March through June 2000 on weekly scale. That would put the loss at a rather steep 13%. That region is also just below the double top high, a likely support zone. This is a risky trade due to overhead resistance so I limited the number of shares bought.”

Here’s the next chart, showing price action. Do you buy more at a lower price, sell, or hold on for a rebound?

The next page shows what I did. More notebook: “9/6/01 I put a stop at 31.50 this morning and it was hit. The stock has breeched a support level and with weakness in the economy and Sept/October upon us, it's time to leave with a small loss. I should have bought at the breakout price. RSI peaked twice and now is headed down, suggesting a sell and CCI says sell too.” Here’s the chart showing those important dates that I conveniently left off…and with good reason.

The middle of the chart shows that I sold just days before the terrorist attacks of 9/11. The stock bottomed at 17.40 on 9/27, well below my 31.50 stop price. I lost 2.5% on the trade. If I sold at the bottom, I would have lost over 18 times as much! Ouch. All of the airlines show a similar price pattern, by the way. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 head-and-shoulders, double top, triangle, scallop, wedge, rectangle, V bottom.

The stock has broken out upward from the head-and-shoulders bottom when price closed above the downsloping neckline. Will the stock throwback (move up, curl around and drop back to the breakout price) and continue tumbling? 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?

The answers appear below and a chart on the next page.

Answer 1: Since the breakout is upward, buy, but expect a throwback because the rectangle overhead sets up resistance. Answer 2: Compute the target price using the height from the head low to the neckline directly above. Then add the height to the stock where price pierces the neckline to get the target. In this case, the target is (18.25 – 15.28) + 16.87 or 19.84.

Answer 3: Volatility is 91 cents so a stop no closer than 15.79 is wise. The right shoulder low is at 15.55 and it looks like a solid block with a flat bottom. It’s a good stop location. Potential loss: 10% measured from the close to the stop.

As the above chart shows, price climbed without throwing back (it didn’t return to the breakout price or neckline within a month or at all, in this case). The stock issued a quarterly earnings report and the stock gapped lower. Question: If you held the stock, should you sell? The answer appears below and the chart on the next page.

Answer: Sell. The top is a head-and-shoulders so you should sell.

You can see the head-and-shoulders top but it looks like a complex one: dual shoulders on each side of the head. The sell signal occurred when price closed below the up-sloping neckline at 27.30. The stock bottomed at 18.74 The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): wedge, 2 triangles, and a flag.

Price moved from a low of 13.35 to a high of 26.22 in less than a month. Where’s the flag in the high and tight flag? If the region circled in red were higher, that would qualify even though it doesn’t look like a flag (appearing like a flag is not a requirement for a high and tight flag). What interested me was the rising price trend. 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?

The answers appear below and a chart on the next page.

Answer 1: Since price has continued to move up, buy. Answer 2: The rise from the trend start to the top of the flag is about 100%, take half of this and that’s what you can expect. Price reaches the target 90% of the time. Answer 3: In this HTF, a stop is difficult. Placing it below the red-circled area (about 19) would be great but it’s too far away. A volatility stop would place it at 22.92, or about 12% away, base on 2x volatility. The next page shows where I placed it.

Here’s my notebook entry for the trade. “Date: 8/29/05 Trade time: buy stop at 25.99, GTC for 2 weeks. Filled at: 26.02 on 8/30/05 Stop: flag low, whatever it happens to be. Now it's 24.95. Stop placed at 23.48 Upside target: 6.32+ flag low (24.95), say 31.27. Future S&P direction (guess): Down Buy reason: High and tight flag. Placed a stop order to buy in a penny above the flagpole high (which is 25.98). 8/30/05 Volatility is $1.71, so the stop should be no closer than today's low of 25.19 - 1.71 or 23.48. That's about 10%.” The volatility measure I used then was 1.5x the volatility reading instead of the 2x multiplier I use now.

The above chart is a day later than the previous one. “8/31/05 Stop raised to 23.86, 1.74 (volatility stop) below today's low of 25.60.”

Question: Is it time to sell?

“9/1/05 Stop raised to 25.09, or 1.44 (volatility stop) below today's low of 26.53. I think we dropped off a large up move a month ago. That's why the big change in volatility.” I raised the stop again, as the above notebook entry says. Question: Time to sell?

How about now? Time to sell? This shows price as of 9/9/05, eight days later than the last chart. See the next page for the next chart.

“Date: 9/14/05 Filled at: 25.06 to 25.08 Sell reason: Hit stop” The stop took me out for a 3.8% loss. Price eased down to a low of 23.37 before making at a recent high of 32.74. The decline to 23.37, meant a potential loss of 10%. Did I make a mistake selling too soon or should I have weathered the drawdown? That’s a question only you can answer because one day, you will be confronted with a similar situation, too. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): triple bottom, 2 triangles, 2 head-andshoulders and the start of a Big W.

The stock has not confirmed the triple bottom nor if you interpret the three bottoms as a head-and-shoulders bottom. 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? The answers appear below and a chart on the next screen.

Answer 1: The next page shows my answer. As I look at it now, I think I’d wait for confirmation – price to close above the highest high in the triple bottom or above the down-sloping neckline. Usually, price continues down before reaching confirmation, so taking a position now seems risky. Answer 2: Measure the height of the triple bottom from highest peak to lowest valley in the pattern and project upward from the highest peak to get a target price of 12.85. Answer 3: Place a stop below the right shoulder low or the head low, that’s either two of the last minor lows shown on the chart. Volatility is 66 cents, so a stop placed no closer than 9.95 would work best. The May low is at 10.05, so it’s too close. The head is at 9.91, so that would be a better choice.

Here’s my notebook entry for the trade. “Date: 5/5/2005 Filled at: 10.78 Stop: 9.89 (that’s 2 cents below the head low) Upside target: 14, site of Dec 2004 high, or high at LT down-sloping TL drawn from Jan 04 high to Dec 04 high. Future S&P direction (guess): Up Buy reason: Triple bottom. Early entry before confirmation, but it also lowers the stop distance, which is below the center peak. My gut feeling is that this triple bottom won't confirm and the price will drop, stopping me out.” Three days later (5/8), I moved the stop at 9.89 to 10.17.

As you can see, the day after I bought the stock made a large up move and a day later (5/9), it gapped upward on a takeover rumor. Price has climbed 24% in just 2 trading days. Question: Do you hold, buy more, sell, or sell short? My answer appears on the next page.

Here’s my notebook entry for the sale. “Date: 5/9/05 Filled at: 13.50 and 13.49 Sell reason: Inverted DCB. I sold this on the rumor of a takeover offer from E-Trade. My research in these large 1-day gains suggests a decline in the coming weeks. Best to get out now with a 25% gain in 3 days.” As you can see, a 25% gain in 3 days was delicious, but nothing like the gain I could have made if I sold at the very peak, 22.25, a potential rise of 106%. Oops. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): right-angled descending broadening wedge (RABFD, 2 of those), double top, scallop, measured move, and a flag.

B and Eve is an Eve & Eve double top. The measured move is ABCD and it follows the same stair-step pattern as the prior up moves. That’s a warning as a pattern so blatant tends to break apart just after you buy in. The RABFD in August has too much white space but I show it anyway. It’s also the start of an ascending scallop. Price has gapped upward out of the flag and consolidated. 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?

The answers appear buried in my notebook for the trade, on the next page.

Here’s my notebook entry for the buy. “Date: 7/11/05 Trade time: market open Filled at: 69.08 Stop: 63.71, an 8% loss Upside target: 74.29, using MMU approach from high (67.99) - low (51.52) = 16.47 x 64% percentage meeting price target = 10.54 added to flag low of 63.75. Future S&P direction (guess): Up Buy reason: Flag breakout, a measured move up type trade. Oil continues to be strong and hurricane passed the gulf where the co has ops.”

Question: Do you sell, hold, buy more of the stock? Answers on the next page.

Here’s my notebook entry: “Date: 7/21/05 Trade time: market open Filled at: 67.75 Sell reason: This looks to be making a head-and-shoulders top. Other stocks in the industry are showing weakness by having bearish patterns. It's time to try to limit the loss and get out. Since the price made a higher high by 16 cents today, I just added that to today's price and placed a limit order, day, to sell at 67.56. My guess is that the stock will make a lower low tomorrow, signaling a downward breakout from the H&S top. That would not be good...This stock hasn't performed as I expected almost from day one. It's time to get out. The stock was upgraded by a broker and it sold at the open.” I sold the stock, placing an order to sell at the market open. What I should have done is gauge where the stock was headed and THEN sold. The gap up on strength may have given me enough backbone to stay in the trade longer. But that’s the danger. If I held on when I thought I should sell and either made more money or lost less, I would be more prone to NOT sell the next time, hoping the stock would move even higher. That’s a recipe for disaster. I guess what I’m saying is that the stock needed to be sold but not by using a market order on the open. Trade it intraday day and sell instead of at the open. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 3 triangles, broadening pattern, 2 headand-shoulders, big W.

The symmetrical triangle has broken out downward when price closed below the lower trendline.

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?

The answers appear on the following pages.

Answer 1: The red line shows what I feel is a robust support zone. If price were to bounce off that line and trend up, would the trade be worth taking? The breakout price is 31.70 and the red line is at about 29, so that’s a decline of 8.5%. Price could drop below this and that’s always a possibility, but in a bull market, going short I feel is always more risky than going long. I wouldn’t short it, but if I owned the stock, I would sell it. Why? Because the support zone may cause price to rebound but it may not. Price could continue lower, much lower. The green trendline also shows a support region but I don’t think the red and green zones are additive. That means the junction of the red and green lines don’t indicate a stronger support area. What’s the answer to the question about trading this one? I think it’s a personal choice. You might want to short the stock but recognize the decline might not be what you hope. Certainly if you own the stock and get a sell signal like the triangle shows, then it’s time to sell. Answer 2: What’s the target price? I would say 29 looks good. I like the intersection of the red and green lines as the point in time where price might stall or even rebound. Either support line would be a good price target. Answer 3: If you were to short this one, where’s the stop price? There’s no overhead resistance to pin a stop. The top of the triangle is a good stop location. If price closes above the triangle top then it’s a good bet price will continue rising. The high is at 34.60 and the current close at 31.40, so that would mean a potential loss of 10%. That’s a bit high for a stop loss. You could place it at A, above the minor high and above the tight congestion at B. The high at A is 33.63 for a potential loss of 7%, so that’s where I would place it. The next page shows the final chart

Price didn’t decline to the red support line but bottomed much higher. Price pulled back and then continued up, rising about 50% from 31 to 46. The triangle busted and those often, but not always, mean a large move in the new breakout direction. They are worth searching for. A busted pattern is one that breaks out downward, moves less than 10% and then rebounds, breaking out the other side of the triangle. In this example, going short would have been a mistake, but selling a long holding would not have been. Sound contradictory? If price continued down to 20, holding onto the stock would have been a disaster. You don’t want to get into the mode of second-guessing your trades. When you get a sell signal (a close below the triangle trendline), then sell. If price makes a large move up, so what? You don’t own it anymore so it should cease to matter. That’s how I treat any stock that rebounds after I sell. It happens. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): head-and-shoulders, double top and bottom, 2 wedges, rectangle, big w.

This is a busy screen. On the upper left in March is a Big W that failed to live up to expectations when the right side didn’t reach the height of the left at 27+. It did form another Big W which stretches across most of the chart. The rectangle top had an upward breakout that closed out the Big W. Price retraced and threw back to the top of the rectangle. Question 1: Do you buy or sell the stock now? Question 2: What is your target price? Question 3: What is your stop loss target? Answers appear below. The next page shows the chart.

Answer 1: Since the throwback looks like it has completed, buy. Answer 2: For the price target, compute the height of the rectangle and add it to the price of the top trendline. The top is at 21.77, the bottom at 19.84 for a height of 1.93 for a target of 23.70. You can see that price reached that on the breakout day. Since that is no help, use overhead resistance to guess a target. If you draw a horizontal line at 24, there seems to highlight congestion areas. That is also the price at which the stock topped out in the days after the breakout.

Answer 3: The rectangle low is a good stop price. That would mean a loss of 10% from the close. Volatility is $0.76 so a stop below 21.08 would work. That would mean a loss of 5%. I would probably opt for the rectangle low because a volatility stop below the minor low seems too close. This is from my notebook of the trade. “Date: 3/1/2005 Filled at: 22.129 Stop: 19.83 Upside target: 27 Future Nasdaq direction (guess): Down Buy reason: rectangle throwback completed on good earnings. I expect next quarter to report good earnings too, sending price higher. The rectangle will support the stock, so risk is low despite a possible dropping market.” Note that I placed the stop just below the rectangle low. I chose 27 as the target, the price near the high in January 2004, the peak at the far left Big W.

More notebook entries. You can figure out where I placed the stops. “3/8/05 Stop raised to 21.13 when the stock shot up over $2 and it's up again today. 4/4/05 Stop raised to 23.70 as price has climb and markets are weak. I want to tighten the stop despite the volatility in the stock. 4/6/05 Stop raised to 24.70 to close on the rising price.” The stock has throwback to the symmetrical triangle apex but the chart doesn’t show price turning yet. Question: What do you do now, if anything? The answer appears on the next page.

I sold the stock. Here’s my notebook entry. “Date: 4/14/2005 Filled at: 24.706 Sell reason: Hit stop. I haven't been monitoring my stocks this week as I've been waiting for an internet connection. If I had followed the stock closer, I might have sold sooner because of the downward pierce of an upward channel.” As I look at the chart now, I have no idea where the upward channel is. I made over 11%. The end.

Bulkowski’s Trading Quiz Here’s the weekly scale first so we can get the big picture. This is not in the order in which I make an investment. I find my chart patterns on the daily scale and when it shows promise, I switch to the weekly scale then the intraday. The weekly scale highlights support and resistance zones, trendlines, and chart patterns that might cause future problems to price movement. The intraday scale I sometimes use to time the entry and exit, but I find that just a market order works best for me. Otherwise, I tend to delay buying or selling until proper entry or exit is long past. It costs me money. What chart patterns do you see? Look for support and resistance zones that might influence price movement. The answers appear on the next page and a hint at the bottom of this one.

Hint: Look for a 3 pipes, a horn, 2 triangles, channel.

A head-and-shoulders top in late 2001 (red) might form if price reaches the height of the left shoulder. It has a high of 15.70 so expect price to top out around 15, just in case it doesn’t match the left shoulder high. As to overhead resistance zones, if you draw a horizontal line from the left shoulder to the right, you find patches of resistance. I show the lines bounding the region in green. The left shoulder block of price movement is clear but there’s also a pause when price declines from the head downward. I would expect price to stall in that range. Thus, a head-and-shoulders top might be likely.

Let’s look at the daily scale – next page.

What chart patterns can you find here? A hint appears below if you need it.

Hint. Look for the following chart patterns: diamond, 2 triangles, broadening pattern.

Above is the daily scale. It shows a descending triangle with an upward breakout. 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?

The answers appear below and a chart on the next page.

Answer 1: Buy. The breakout is upward, so trade with the trend. Answer 2: You can use the measure rule for the triangle, which is the height added to the breakout price to get a target. This time, however, let’s use support and resistance. See the next page.

I see stiff overhead resistance in the solid block or price movement in January 2002 compounded by the July peak. I expect price to stall or even reverse there, maybe causing a throwback. That’s okay, because price rebounds 86% of the time. This is the same as the head-and-shoulders we saw on the weekly scale. The left shoulder is in July and the head in December. Answer 3: What’s the stop price? Certainly the bottom of the triangle is a good place. Price already shows support there. I’d check placement for volatility to see how close it should be placed (see my website for stop placement and look for a volatility stop). The next page shows the chart.

Price has touched the top of the resistance zone and has now closed lower. I show the price trend in the inset. Do you see anything that might cause you to sell? Question: Do you hold onto the stock, buy more, or sell, maybe even sell short? One answer appears below.

The rising wedge looks almost like a channel except the lines aren’t parallel as they are in a channel. Since the wedge has a downward breakout, that means sell, but is it the right decision? See the next page.

The stock found support at the bottom of the descending triangle before recovering and forming an Eve & Eve double top. After that pattern confirmed (when price closed below the valley between the two highs), price continued lower, cutting itself in half (15.60 to 7.57). In this case, selling a long holding and shorting the stock would have been a good move. Holding on would have been a costly mistake.

Here’s the weekly scale, and we guessed right about the head-and-shoulders.

The end.

Bulkowski’s Trading Quiz Today I’m focusing on patterns on the weekly scale. What chart patterns can you find? A hint appears below and answers on the next page.

Hint. You can find several chart patterns, such as a double top and a broadening top, but I’m looking for only these: pipe tops and bottoms, upside and downside weekly reversals.

The three pipe tops appear using the same algorithm that patternz uses. Note how they appear at the tops of major turns (2/2000, 5/01 and 3/02, with a P above the price). Maybe that’s why it ranks 3 out of 21 for performance in a bear market, and 4/21 in a bull market (1 is best). Pipe bottoms appear as a P also, and I only show those 4 found by patternz. They appear in 2/2000, 9/03, 10/03, and 7/05. Pipe bottoms rank 2 out of 23 in a bull market and 3 out of 19 in a bear market for performance (1 is best). They fail infrequently, but don’t stake your reputation on them issuing a reliable trading signal (like any chart pattern). Since they appear on the weekly scale, price may slip far before the pattern confirms. Upside (U) and downside (D) weekly reversals I find are unreliable. I only show a few of them on the chart as they appear like rats in a corn silo. The latest version of patternz finds these also. Note that these reversals are outside weeks with a close either above or below the prior high/low. I show drawings of the four chart patterns in blue on the chart. Before you make a trade, it’s always wise to check a higher and lower time scale than the one you usually use. Chart patterns appearing on those scales may help you determine whether your trade will work or not. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Big W, 2 head-and-shoulders, 2 wedges, 2 scallops.

The rising wedge is usually a bearish chart pattern, so the upward breakout – when price closes above the top trendline – seems unusual. How do you trade it?

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?

The answers appear starting below and a chart on the next page.

Answer 1: If you look at the bearish rising wedge as a busted pattern (the breakout is usually downward but it’s upward in this example), then buy. But first, check for overhead resistance. That appears on the next page.

The two red lines are what I think are overhead resistance. I drew them by connecting the peaks, valleys, and congestion areas. The lower red line looks to be too close to the breakout to stop price. Breakouts usually push through nearby overhead resistance. Will it stop at the top trendline? That’s the danger of trading a chart pattern that is NOT trading at the yearly high. There’s always overhead resistance. Answer 2: Target price. It might stall at the top trendline or continue on to the old high at 18 and form a double top. Answer 3: If you were to buy this stock, a stop placed below the wedge trendline would work. I show possible locations as points A-D. Point A looks too close. A quick down move would trigger a sale. B isn’t much better. C and D seem to be far enough away to lend protection. Volatility is $0.50, meaning a stop place 50 cents below the low at 14.30 would work. The 14.30 is the most recent intraday low price. That means point A is out but anything at B or below will work. On a percentage loss basis, B is at 9%, C is 11%, and D is 14.2%. That’s one of the problems with low priced stocks. A meaningful stop loss point is often a high percentage away from the buy price. The next page shows what happened to the stock.

Much to my surprise, the lower bar of overhead resistance stopped price on numerous occasions, forming a broadening chart pattern (right-angled and descending). Buying this stock would have been a mistake. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns: triple bottom and top, double top, triangle, 3 rising valleys.

The triple bottom really has four of them, but ignore that. Price confirms the pattern when it closes above the highest peak between the three bottoms. Price also confirms the descending triangle. The long-term downsloping trendline shows price piercing it, moving up.

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?

The answers appear below and a chart on the next page.

Answer 1: Recognize that you are late getting into the trade, but the buy signal is clear. Answer 2, 3: The next page shows my notebook entry and it answers these two.

Here’s my notebook entry for the buy. “Date: 11/17/04 Filled at: 15.869 Stop: 13.23 or 16.7% Upside target: 18, site of SAR, 17 has a knot of SAR during May '04. Future S&P direction (guess): Up. We are moving into December and the markets are searching for new highs. Buy reason: Busted (but unconfirmed) head-and-shoulders. The stock has pierced the down-sloping trendline and pushed above the H&S. Bollinger bands look good. They are narrow and beginning to widen out, easing the way to higher prices.” As I read this, I’m scratching my head. I think the busted head and shoulders I refer to is marked L, R, and H for left, right shoulders and head. My jaw dropped when I read of the 16.7% stop distance. That’s just too far. It’s located below the triple bottom low. If a trade has a stop that far away then you really need to reconsider the trade. Do as I say, not as I do! Now, I would use a Fibonacci retrace to narrow the distance to 14.31 or 10% away. Volatility is $0.93, so a stop no closer than 14.54 would work. Placing it there would cut the potential loss to about 8.5%.

I show the red horizontal line as the overhead resistance I mentioned in my notebook entry. That’s the target with a knot of resistance near 17 I also mentioned. That’s the green circle with a green line at 17. Expect price to stall there or at the red line. The following page shows the Bollinger bands.

The Bollinger bands are just showing the beginning of a widening move. Narrow bands often precede large price moves in the stock.

The following page shows the next step.

From my notebook: “11/29/04 Stop raised to 13.73 12/6/04 Stop raised to 14.93 12/16/04 Stop raised to 16.23” Fortunately, I raised the stop, narrowing the potential loss from 16.7% to 13.4% (still too high) to 6% (reasonable) to a gain of 2% on 12/16. That is, if price drops that far. The last stop is positioned below the minor low that occurred just a week or so before. Question: Looking at the chart now, is the stop in a proper place or should it be closer or farther away? The next page shows what happened to the stock.

I’ve often remarked that price sometimes makes a quick decline after a quick rise and this is one example. You often see the quick rise/decline behavior in diamonds. A quick rise leads to the diamond and a breakout drops back down just as quickly. Here, the stock plunged and took me out. It dropped back to the top triangle trendline boundary before forming a double top and then dropping even lower. I made 2% on the trade and that’s certainly better than the 16.7% loss I started with (that is, the initial stop loss position). The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): ugly looking diamond, 3 falling peaks, triangle, 2 wedges, channel.

Unfortunately, I don’t show the last 2 days on the chart. Price closes above the top of the triangle on volume that is slightly less than the last bar on this chart. 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?

The answers appear below and a chart on the next page.

Answer 1: Buy because of the upward breakout Answer 2: Measure the height of the triangle from highest high to flat bottom trendline and project it upward from the breakout price. Price meets the prediction 84% of the time.

Answer 3: Stop price would be the below the bottom of the triangle. That would mean a potential loss of just over 4%.

Price broke out upward from the triangle and then quickly reversed, hitting the stop in just days. It happens. If you didn’t have a stop in place, look at your loss! The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): unconfirmed head-and-shoulders, triple bottom, scallop, cup with handle.

I show the cup with handle that connects the two peaks in April and late December (the left shoulder of the head-and-shoulders top). Price broke out upward of the handle when price closed above the left shoulder high. Then price stopped rising at the head and retraced. This is typical of cups. They breakout upward and rise maybe 5 to 15% before dying. Lots of people love cups but my performance stats show they are mid list performers (13th out of 23 with 1 being best). I’ve tried trading cups but their results never lived up to their promise. 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?

The answers appear below and a chart on the next page.

Answer 1: Wait for price to close below the head-and-shoulders armpit – the valley between the head and right shoulder before shorting the stock. Answer 2: Measure the height from the head to the neckline directly below the head and project that downward from the right armpit to get a target price.

Answer 3: Place a stop at the right shoulder high.

To get a better handle on how far price is likely to drop, look for underlying support zones. At the base of the ascending scallop is a small knot of price movement. I would expect price to stall here (see the above chart as “Small support zone here.” Since a quick decline often follows a quick rise (with a pause in between where chart patterns form as reversals, typically diamonds), I would expect price to eventually return to the low at A after the quick rise to B. If that didn’t hold, then I think the low of the triple bottom would support price. I show that as the “Big support zone here.” The next page shows what happened.

The A support zone at the base of the ascending scallop didn’t even slow the decline. Support at B held up better. Price bounced upward in March 2005 but rounded over and found support near C. C supported price at a slightly higher level than I expected, forming an ascending triangle. Support and resistance isn’t one price but a zone or area of support or resistance, such as this example shows. The ascending triangle broke out downward, warning anyone still holding onto the stock that it was time to sell. Price gapped lower in early June and has found some footing in August. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 triangles, scallop, big w, double bottom, diamond, flag.

The Qtr symbol in the upper right of the chart says the company issued a quarterly earnings announcement on that date (the spike). 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?

The answers appear below and a chart on the next page.

Answer 1: The breakout from the surprising earnings release is downward, so avoid buying. With price near the yearly high, you don’t want to short either. I’d look elsewhere for a more promising trade. Answer 2: Look what happened at the prior spike, at point A. Price eased lower and that’s what I would expect from the stock now. I would expect price to drop to the green target line. I don’t think A will support price because price is already there. If price does drop then it might find support at the Dec peak (green line) with additional support from the minor highs in June. Answer 3: Since price is expected to drop, placed a stop above where it’s trading now. I’d put it above the Qtr spike.

It never ceases to surprise me how I can be right and wrong at the same time. I correctly identified where price would stop – it’s circled in red. But I missed the extended decline that dropped the price nearly in half. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 flags, 2 triangles, 2 scallops, diamond.

The high, tight flag appears when price doubles in less than 2 months, as it did here. I circled what I considered the flag portion of the HTF.

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?

My answers appear on the next page.

Here’s my notebook entry for the trade. “Date placed: 12/21/05 Order type: buy stop at 20.46, a penny about the HTF high on 12/16/05. Expires in 15 days, on 1/5/06 because the flag length would be too long after that. Date Bought: 12/23/05 Bought at: 20.49 -- 20.46 Stop, % loss: Flag low, whatever that happens to be. That's too close with this volatile stock. Volatility, stop: $1.03, 18.11, -10%. Placed 12/23/05 Upside target: 26.16. Using HTF 50% measure rule: 20.45 - 9.03 (9/29/05 low) added to 20.45 high on 12/16/05

Future market direction: Up Indicators: Bearish divergence in the CCI and riding along the top band in Bollinger Associated commodities: Oil: Downward trend Score and price target: +2, 25.43 Industry and stock rank: 10/46, 1/8 SAR: Support at 17-18. Overhead round number resistance at 20 and 25. Buy reason: HTF Buy again plans: None.” I placed a buy stop above the top of the pattern and I find that’s mandatory when trading HTFs. I’ve seen too many of these patterns form a flag, break out upward (but below the flagpole top) and then continue sliding. Placing a buy stop above the highest high in the pattern is the only way to trade this one. I placed a stop according to 1.5x the volatility of $1.03, or 10% below the buy price the day I bought (placed at 18.11). The price target was 26.16, which is half the measure of the flagpole height. The next page shows charts of the CCI and Bollinger bands.

The green sloping line shows the bearish divergence between the CCI indicator and price. In the top half of the picture, the red and green vertical bars are sell or buy signals, respectively. They are generated when the delayed CCI (DCCI) crosses the CCI or when CCI crosses the 0 line. Usually, I ignore the signals. Oddly, this chart says NOT to buy the stock.

Here’s the Bollinger bands. Price is riding along the tops. The only concern is that price will eventually drop from the top band, through the middle one, and touch the bottom one, which would be quite a drop if the bandwidth doesn’t change.

This is the price of oil. It peaked in September and has been on a steady downtrend since then except for a retrace around mid November. The price of oil isn’t as much of a concern as the price of plane fuel, which I don’t track…

“Score and price target: +2, 25.43” I scored the HTF and found that it had a +2 score with the median rise of 25.43. See my book, Trading Classic Chart Patterns for the scoring system details. “Industry and stock rank: 10/46, 1/8” I used the price move over the last 6 months for this notebook entry. Out of 46 industries I track, air transports ranked 10th for performance (1 is best). Of the 8 airlines I follow, the stock ranked first, showing excellent upward price momentum.

“SAR: Support at 17-18. Overhead round number resistance at 20 and 25.” See the next page for a chart.

I drew two horizontal red lines at 17 and 18. This is bracketing the congestion region in early December. Round number resistance is at 20 and 25. You can see that the stock paused at 20, shown by the green line, pointing to the flag portion of the HTF. The next page shows how the trade progressed.

“12/27/05 Stop raised to 19.13, a penny below the flag low as price climbed over a buck. 1/4/06 Stop raised to 19.78, which is a vol stop using 2x volatility.” The above chart shows where I bought the stock and where and when I moved the original stop at 18.11. When price made a new high the day after I bought, I moved the stop up to a penny below the prior low, to 19.13. When price made a new high in the new year, I moved the stop up again, using 2x the volatility as a guide. The following page shows what happened next.

Here’s my notebook entry for the exit. “Date placed: 1/9/06 Date sold: 1/10/06 Sold at: 21.84 Sell reason: I looked at the other HTFs for the past 2 years. Those that confirmed topped out when the CCI diverged from price. The CCI is diverging with price. Today, the transports were up 24 and this stock was down 3 cents (Friday close on 1/6 to Monday close on 1/9). I think it's topped out and I don't want to give back my 7%. I might be early but the market (S&P) has been up for 5 days in a row and it's due for a setback. That I think will happen tomorrow. The transports have made a sym triangle, sorta, with downward spikes. That suggests to me price weakness, that a definite downward breakout will occur.” I sold at the market open, 21.84, which is just short of the intraday high of 21.97. I felt very strongly about the sale, that I was making the right move. It turns out this was the perfect exit. I escaped the downward price plunge that began on the day I sold. In 6 days, including the day I sold, price plummeted 24%! I made 6.5% in about 2 weeks time. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Double bottom, head-and-shoulders, potential big W. For the double bottom, identify the correct Adam and Eve combination.

When price closes above point A, it confirms the Eve & Adam double bottom. 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? Answers appear below and a chart on the next page.

Answer 1: Confirmation means a breakout, so buy. Answer 2: The height is A minus the lower low. That’s 10.20 - 7.63 or 2.57. Add this to the breakout price (10.20) for a target of 12.77. Price hits the target 66% of the time, so be conservative. A better target would be the high where the Big W starts, not the highest high, but the cluster of prices at about 11.45. That’s below the round number 11.50 where everyone else might sell. Answer 3: If you place a stop below the lowest low in the pattern, that would be too far away from the breakout (25%) so you could put a stop at B (12% away) or C (8% below). Both points are support or resistance areas where you could expect price to stop.

Price has reached the top of the Big W and broken out upward from a diamond top. Question: How far will price rise? One answer appears below.

Answer: You could guess using support and resistance but here’s another method. Measure from the trend start (7.63) at the Adam bottom to the top of the trend (the right side of the big W) at 11.74. Multiply by 38% (a

Fibonacci ratio value) and add it to the trend high. That is 11.74 + (4.11 * 38%) = 13.30. This method is what’s called a Fibonacci extension. The next page shows how well the method worked in this example.

Again, look for a straight-line run from A to B, measure the distance between those two points and project upward from B. In this example, price hits the target and tumbles. The target also nearly matches overhead resistance set up by a peak and valley earlier in the year, as I show. You may be excited about this, but let me warn you. I don’t think it works that often. If the target happens to coincide with overhead resistance, then it’s more likely to be correct. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 5 triangles of various types, scallop, and a pipe on the weekly scale.

The stock has closed above the top of the ascending triangle, following a classic volume pattern (diminishing over time as the breakout approaches). 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?

The answers appear below and a chart on the next screen.

Answer 1: Since the breakout is upward, that’s a buy signal, but read the caution in answer 3. Answer 2: Measure the height of the triangle from the top trendline to the lowest valley in the pattern and add the height to the price of the top trendline. That would give a target of 16.98. Price reaches the target 75% of the time. That may sound like a good number but be conservative and look for nearby resistance zones where price might stop. Answer 3: Volatility is $1.20, so a stop no closer than 12.30 (the volatility subtracted from the current low) would work well. I would place the stop near point A (see the chart), which is at 11.81, call it 11.77. That would place a potential loss at 15%, which is too far away. So, I’d move it up to near B, which bottoms at 12.22, so I’d place the stop at 12.17. That would narrow the potential loss to 12%, which is still too high. That’s the problem with trading lower priced stocks…you could take a potential pasting if the trade goes bad, but if it works, the results can be breathtaking. This is a trade you may decide to stay away from because the volatility and distant stop placement are signaling high risk.

Here’s an example of a trade gone bad. As good as many people think ascending triangles are, they have a tendency to bust -- curl downward after an upward breakout. Trade them carefully. The stock bottomed at 8.35 in May, a drop of 40%, which emphasizes the need for a stop to limit losses. The Ps on the chart are pipe bottoms that appear on the weekly scale but my program (and patternz) automatically identifies them on the daily chart so I don’t have to search the weeklies. The HTF is a high and tight flag, a move where the stock doubles and then pauses before moving up about 50% higher. HTFs also have a tendency to fail often. In fact, the HTF shown here peaks at 26 and then tumbles to 18.64 in about 5 weeks. The end

Bulkowski’s Trading Quiz

What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 triangles, broadening top only

The first symmetrical triangle I drew used an internal trendline as marked. Internal trendlines are ones where the price outliers poke outside the line. It connects the majority of trading. The more recent triangle shows a downward breakout that busted followed by an upward breakout. A busted chart pattern suggests a powerful move upward, but in this case? A pattern busts when price moves less than 10% away from the breakout before reversing and breaking out in the new direction.

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?

The answers appear below and a chart on the next page.

Answer 1: Buy because the breakout is upward after the busted downward breakout. Plus, there’s no overhead resistance because the pattern is trading at the yearly high. Answer 2: Measure the height of the triangle from highest peak (21.93) to lowest valley (19.31) in the pattern and project it upward from the breakout price (20.53). The target is 23.15.

Answer 3: From the 20.53 breakout price, place a stop below the minor low at 19.15. That would make the potential loss 7%, which is acceptable. The volatility is $0.65, meaning don’t place a stop closer than 19.69, so a stop at 19.15 would work. The following analysis using the scoring system I discuss in my book Trading Classic Chart Patterns. I found the following factors important in how price performs after the breakout from a symmetrical triangle. 1. The trend starts in August 2003. I show it as point 1 on the chart. It’s a place where price climbs at least 20%, moving backward. Intermediate term rises score 0 for this pattern. 2. Since the breakout is near the yearly high, there is no horizontal consolidation region to worry about (overhead resistance). That scores +1 for a +1 total. 3. The breakout price is within a third of the yearly high for a +1 score. Total +2. 4. The height of the pattern is 21.93 – 19.31 or 2.62, divided by the breakout price (20.53) gives 12.76%. That is below the median 15.98%, so this triangle is a short one for a -1 score. Total +1. Height is the most important factor influencing performance, by the way. 5. The volume trend doesn’t influence how this pattern behaves after the breakout, so the score is unchanged. 6. The breakout day volume is above average so that scores +1 for a total of +2. 7. Is a throwback likely? That is always a tough question. I see no overhead resistance that would cause a throwback so that scores +1 for a total of +3. It you think a throwback will occur, then deduct 2 from the final score (you remove the +1 we just added and add in a -1 for a throwback). 8. Will the pattern move up less than 10% before dropping below the bottom of the pattern (a bullish trap)? If we were to score the pattern after the downward breakout (a bearish trap), then we can see that the pattern busted (downward breakout with a quick turn to the upside and a later upward breakout). However, we are only looking at the upward breakout and with no overhead resistance to force price back down, it’s unlikely to bust a second time. Thus, the pattern won’t “bull trap” for a +1 score. Total +4. 9. The pattern doesn’t have a breakout day gap but it wouldn’t matter if it did for this pattern. The score is unchanged. 10. The market trend in the S&P 500 from the start of the pattern to the end is rising for a -1 score, oddly. Total +3. 11. Market cap is the number of shares outstanding multiplied by the breakout price. Computing that places the stock in the small cap category, which I define as up to $1b. Score: +1. Final score: +4. Chart patterns with scores above 0 have rises that average 46%, if traded perfectly, without commissions and other fees. Those with scores below 0 rise just 19%. The median rise is 28.47%. That means a price target of 26.37 from the 20.53 breakout. A positive score is no guarantee of success, because it just tells you the probability of the chart pattern doing well. I use the system whenever I trade and rarely will I trade a pattern with a minus score. How did we do? The next page shows the answer.

I show a few other chart patterns along the way to riches, the symmetrical triangle we’ve talked about followed by an ascending triangle and a broadening top. The scoring system worked because price climbed to reach or exceed the target. Notice the consolidation region in August that touches the target price and rebounds there. I think that’s coincidence, but it’s interesting. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): head-and-shoulders, wedge, 2 scallops.

At the end of the chart is a rising wedge. Wedges are tough to spot and they don’t work well, but some traders swear by them. Price has poked below the end of the wedge as it’s drawn here but price still closed within the trendline boundaries of the wedge. Thus, no breakout has occurred. Question 1: What is likely to happen next (which way is price likely to go)? Question 2: If you own this stock, do you hold on, sell, buy more, or freeze like a novice trader? Question 3: What is your target price? Question 4: What is your stop price? The answers appear below and the price action appears on the next page.

Answer 1: 69% of the rising wedges I looked at broke out downward, so that’s the way I would guess price is going. Answer 2: If price DOES breakout downward, then how far will it go? Once you know that then you can determine whether it’s time to sell or not or just ride out the decline. If I hold a stock and it breaks out downward, I usually sell immediately. Price prediction is an art, so I play it safe and exit then let the market do what it will without me. Answer 3: Price usually drops to the wedge low 46% of the time in a bull market, so that’s one target. If I owned this stock, I would expect a slide to 28 to 30 before price met support. The green line drawn near 29 on the chart shows what I’m talking about. Price touches or nears the level a few times. Answer 4: Volatility is $1.26 (that’s 1.5x the average high-low range over the last month) and the current low price is 35.29, so a stop closer than 34.03 would risk being stopped out on normal price movement. However, since this is a bearish chart pattern, I would err on the side of caution and place a stop just below point A on the

above chart. I would also sell immediately if price closes below the lower wedge trendline. More recently, I’ve increased the volatility to 2x instead of 1.5, so keep that in mind. Research suggests 2x works better than 1.5.

Price punched through the wedge bottom and moved lower, fulfilling the measure rule by spiking below the lowest valley in the wedge. Notice how price in October stopped near 29, just as predicted. Wow. Maybe this stuff works! The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): one-day reversal, double top, 2 rectangles, ascending triangle.

Nested inside the rectangle is an ascending triangle. You can call it a busted triangle or a rectangle with an upward breakout. 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?

The answers appear on the following pages.

Answer 1: Before making a trading decision, search for overhead resistance and underlying support. The red lines show overhead resistance setup by the congestion region in June 2002. Other regions may exist before that, so you should check those also to see how robust the region is. The green lines cluster around peaks and valleys. They show potential support areas. When thin overhead resistance is nearby, say less than 5% away, then a strong breakout will usually carry prices through it. This potential trade shows a wide block of resistance that suggests price will throwback. Whether it will have enough strength to power through it remains to be seen. In short, I would probably avoid trading this one. The rectangle is appealing, but there’s too much overhead resistance. Answer 2: Use the measure rule for triangles or rectangles (the height added to the breakout price) to get a target price. That gives a target of 29.60, placing it at the top end of the resistance zone. That’s probably a good target. If you were a short-term trader, then a sell order placed near that price I think would do well, but we’ll see in coming charts. Answer 3: The small knot of congestion in mid May ‘03 looks like a good support area but it’s too far away from the current price (19% below the current close). The bottom of the rectangle is a good stop area. That cuts the loss to 15%, but that’s still a lot to lose. Try a Fibonacci retrace of 62% of the move from A to B. Place the stop a few cents below it. I would choose 23.97 with the Fib number of 24.05. The potential loss would be 9%, which is tolerable. A quick check of the volatility says to place a stop no closer than 25.60 (current low) – 1.62 (volatility) = 23.98, which is just a penny above the chosen stop price. I would place a stop at 23.97. The next page shows what happened.

Price made a good start moving up but ran into overhead resistance right in the predicted zone. Price threw back to the rectangle top then rebounded as it does the vast majority of the time (86%). But it stalled approaching 29 (point A) and returned to the price bounded by the two rectangle trendlines (B) before trying once more to make a new high in October (C). The rise to C stopped before climbing above the Sep peak (A) and that’s not a good signal – a lower high. Price dropped through the bottom price of the rectangle, completing the disaster. Price never made it up to the 29.60 target before tumbling below the stop. The stop at 23.97 would have held because price at B dropped to just 24.17. Of course, if you didn’t sell after that or if you raised your stop along the way, price would have taken you out for a loss most likely. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Scallop and 2 triangles, head-andshoulders.

The ascending triangle has broken out upward. Question 1: Do you buy or sell short? Question 2: What is your target price? Question 3: What is your stop loss target? The answers appear below and another chart appears on the next page.

Answer 1: Buy because the breakout is upward. Answer 2: Try this approach. Draw a line parallel to the up-sloping trendline like that shown in the below figure. When the line HITS THE DATE OF THE BREAKOUT, the value of the black trendline is the target. It shows a price of about 39.

Answer 3: I think point A in the chart at the top of the page is too close (4% loss). I would opt for point B, a potential loss of 8%. Volatility is $0.93, so a stop no closer than 33.49 would be wise. That also means B is a better choice than point A.

You can see that price didn’t reach the target. After throwing back, it continued upward until peaking and it’s now coming down. Question: Do you hold onto an existing position or sell? My answer appears below and the next page shows the result.

Answer: If I owned this stock, I would sell it. The stock has dropped out of a block of congestion and is now moving down at what appears to be a good clip. Although I would expect the triangle to support price, that would occur at about 33.40, just below a block of congestion. The horizontal black line in the picture shows it.

Surprise! Price rebounded forming a tail and it hit the 39 price target shown earlier. Price climbed to almost 50. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Two triangles, diamond, wedge, broadening bottom, triple bottom.

The blue lines were drawn by my program so they are not as accurate as hand drawn ones, so forgive the appearance. The ascending triangle has price closing above the top trendline. 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? The answers appear below and a chart on the next screen.

Answer 1: Buy the stock because of the upward breakout. Answer 2: Set the price target to near the top of the broadening bottom (28.13) or the diamond top at 28.70. Since two tops appear near 28 (Sept ‘04 and April ‘05), 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 chart (the diamond top). Answer 3: A good stop point would be just below the knot of support at 26.70, just below where price is currently trading. 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) of the knot I mentioned as a support level. Price recovered and peaked near 31, twice, forming what appears to be a double top. Question: Do you sell, hold on, or buy more? Then answer appears on the next page.

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. The end.

Bulkowski’s Trading Quiz Today’s quiz isn’t a quiz at all but a trading tip I used to avoid buying Chevron.

With CVX, I saw the triple bottom acting as the reversal at the bottom of the W instead of the usual double bottom. I allow any chart pattern to appear at the bottom (instead of the usual double bottom) of a straight-line decline of the Big W like the one shown. Anyway, I decided that if I bought on the day shown above, I would lose money. Why? I show the answer below.

As predicted, price moved lower. The key was the volume chart. All I looked at was the green bars. Price had been moving up for 4 days in a row. Would it make a 5th day up? Maybe, but the probabilities suggested otherwise. Notice that a few days earlier, price moved up for 6 days in a row. In my program, I can count the number of up and down days and tell the probability of price continuing the move. In this case, the probability of price moving up for a 5th day is 6%. The probability of price moving up a 7th day is 1%. Thus, I suspected that price would close lower the next day, which it did. I saved myself some money by delaying the entry. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns: double and triple bottom, triangle, double top, pennant

The three bottoms labels 1, 2, and 3 are not the bottoms of a triple bottom. Why not? Because the pattern is not confirmed. That means price doesn’t close above the highest peak in the pattern before tumbling below the pattern’s low. Price has broken out above the Eve & Eve double bottom, confirming it as a valid chart pattern. It also finished a small pennant pattern. Overhead resistance at the 1, 2, 3 bottom appears as a red line on the chart. If you were to buy now, you are getting in after confirmation and possibly will be buying when price has touched overhead resistance and is about to throwback. 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?

The answers appear below and a chart on the next page.

Answer 1: The safest thing to do is wait for a throwback. A better entry would be to place a stop order to buy at the price of the EEDB top. That would get you in at the breakout price, not a few days after confirmation like you would be doing now. Answer 2, 3: My notebook entry on the next page shows the answers to these two questions.

“Date: 2/7/05 Filled at: 12.69 Stop: 11.05, just below the pennant in Feb. Upside target: 15.71 using book score method (the median price rise for an EEDB). Future Nasdaq direction (guess): I expect the Nasdaq to stall at the knot of overhead resistance and turn down. That's not good for the stock, but it shows strong upward momentum and I'm hoping the flag (in the stock) will support the stock. Buy reason: EEDB. A strong breakout on Friday suggests an extended move, but I think the fundamentals are weak. This may throwback at 14 due to overhead resistance in June 2004. The 13-16 range is going to be a problem for this stock (May to June consolidation region -- a MMD corrective phase [I show this as 1, 2, 3 in the chart]). If the Nasdaq turns around (continues up), this stock might do well. I chose this over Intel because of the book score. Intel has a -4 score and upward breakout from descending triangle. CCI said buy on Friday and the stock is riding the top Bollinger band upward.”

Here’s the Nasdaq chart with the small knot of resistance I wrote about in my notebook. It forms along a resistance band I show as blue lines, corresponding to peaks or valleys.

More on the next page.

This is a complicated looking screen but it shows the CCI indicator in red on the bottom pane and a smoothed CCI in blue (the DCCI). A bullish crossover occurred as shown in the upper partition of the screen in green is the most recent signal. A trading signal is when the CCI line crosses the zero line. The zero line is the one in black on the bottom pane and a green vertical bar shows the buy signal location on the top pane.

The next page shows the Bollinger band.

You can see price in the bottom pane trading along the upper band with the upper and lower bands expanding.

The next page shows the view a few days later.

This figure shows what I saw. The zoom in the upper right shows that price opened near the intraday low and it closed there. The zoon on the left shows what I expected to happen – that of a tail or spike forming on high volume. The high volume led me to believe it was a one-day reversal (the high volume appears on the bar chart, not on the zooms). Question: What do you do with the stock, assuming you own it? Do you buy more, hold, sell, or short the stock? My answer appears on the next page. “Date: 2/10/2005 Filled at: 13.28 Sell reason: Stock has made what looks like a tail. Time to sell before I give back more profit and the stock plunges.”

The chart shows where I bought and sold. The lesson I learned from this trade is that with a spike/tail, you should always wait another day for the picture to clarify. In short, I sold too soon. I made about 4.5%. That’s not bad for a 3-day hold time. On an annual basis, it’s over 540%. Now THAT’s a good gain! The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 wedges, triangle, 3 broadening patterns.

Imagine that you own this stock. How do you decide when to sell? That’s a tough call when there’s no chart patterns to call the top. That may mean the top has not been reached yet, but more likely it means that price has reversed without creating a pattern you recognize. Question 1: Do you sell this stock now? The analysis appears on the next page.

Victor Sperandeo in his book Trader Vic – Methods of a Wall Street Master described his trend change method which I call the 1-2-3 trend change. My books Trading Classic Chart Patterns and Getting Started in Chart Patterns discuss the method at length. Here’s a brief review. Draw a trendline from the lowest low to the highest high on the chart such that the line doesn’t pass through prices until AFTER it reaches the high. I show this line in red in the above chart. Step 1: Price closes below the trendline (point 1) Step 2: Price retests the high. Sometimes it exceeds the prior high but most times, as in this case, it doesn’t. The high is 2A and the retest is point 2. Step 3: Price drops below the minor low (valley) between the two peaks, 2A and 2. After all three steps occur, price has changed trend and it’s time to sell a long position or consider going short. The next page shows the chart.

Price completed the 1-2-3 trend change and formed a rounding turn. After that, price moved up in a straightline run and formed higher highs. Price at A reached a high of 26.85 and the low at B was 21.19, a decline of 21%, which qualifies as a trend change (20% is the minimum). The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): head-and-shoulders, double bottom, scallop, busted double top, triangle, and a triple bottom(?).

The 1, 2, 3 mark what looks like a triple bottom. I don’t call it that because price needs to trend down into the chart pattern. The Eve & Eve double top busts because price doesn’t close below the middle valley thereby confirming the chart pattern. I thought the complex head-and-shoulders bottom (CHSB) during April through June was a simple one, meaning it had one head (in May), the left shoulder as marked, and the right shoulder as the right bottom of the double bottom (marked A on the chart). When I ran the chart pattern through my scoring system (see my book “Trading Classic Chart Patterns,” it scored -3 meaning that the probability was doubtful that it would reach the 62.04 target price. The stock has completed a throwback to the neckline of the CHSB and appears to be moving up. Question 1: Do you buy the stock, sell short, or pass up the trade? Question 2: If you decide to trade it, what is your target price? Question 3: What is your stop loss price? The answers appear below and a chart follows on the next page.

Answer 1: Recognize that you are getting in late, but buy the stock. A better entry would be when price pierced the trendline (using a buy stop at that price) or sooner after price rebounded from the throwback. Answer 2: I already mentioned my book score target. For the simple head-and-shoulders bottom (forget that it has a dual head), measure the height from the May head low (42.88) to the neckline directly above (49.24) and project the height (6.36) upward from the breakout price (47.52). That would give a target of 53.88. Price meets the target 74% of the time so be conservative in your estimate. For the dual HSB, use the widest distance between the lower head and neckline, vertically, but realize price may not climb that far. Look for nearby resistance zones where price might stop.

Answer 3: Using a volatility stop (1.5x the 30-day volatility is $1.41. See the website page “stop placement” for more info on vol stops) means placing a stop no closer than 46.34, which is below the prior minor low at point B (which has a low of 46.51). I would use a 62% retrace of the rise from point RS to C, giving a stop location of about 45.61. Here’s my notebook entry for the trade. “Date: 7/29/05 Filled at: 48.32 Stop: 43.53, about 10% down Upside target: old high at 56 Future S&P direction (guess): Up Buy reason: confirmed head-and-shoulders with throwback completed. Earnings have sent the stock moving higher, but it was down when I bought. I consider this a longer-term holding as I want to give it time to move up a lot. CCI said buy yesterday.” Notice that I placed the stop lower than “answer 3” (43.53 versus 45.61). I placed the stop below the minor low at RS on the prior page’s chart. That would mean a potential loss of 10%. I could see this chart pattern making what looks like a Big W, rising to the height of the old high at 56, so that was my target. CCI is the commodity channel index, a short-term trading indicator that I usually ignore.

The stock made a higher high before backtracking. Question: What do you do now? Do you buy, hold, or sell the stock? My answer appears on the next page.

Here’s my notebook entry. “8/16/05 Stop raised to 45.41 because it was too far away and I think I'll be stopped out. Best to cut losses.”

A week later, I changed my mind. Here’s my notebook entry for the sale. “Date: 8/23/05 Trade time: market open tomorrow Filled at: 45.95 Sell reason: This looks like it's going down. The other stocks in the industry all look like they are tumbling or about to do so. Time to cut the loss and exit now.” I canceled the stop order and just sold it. I lost about 5% on the trade. Notice that the original stop was for a potential loss of 10%, so even though I lost money, I cut my losses. That’s the way it should be. The stock hit 40.18 as the chart shows, well below the 45.95 price at which I sold. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): wedge, triangle, scallop, double bottom, Big W.

The rising wedge has broken out downward on exceptionally high volume after a quarterly earnings release. 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?

The answers appear below and a chart on the next page.

Answer 1: Since the breakout is downward, consider shorting the stock – if you dare. Answer 2: The rising wedge target is usually the start of the wedge (the bottom). In this case, the top of the symmetrical would be a good target, I think. Call it 26.07, which is above the round number support of 26.

Answer 3: If price rises above the recent congestion, then sell. I show the congestion area circled in green, say 29.54.

Prices formed a three rising valleys chart pattern in the process of curling around the end of the wedge. Price closed above the top of the pattern meaning that if you shorted the stock you probably lost money. Is the behavior of the wedge surprising? Not really. In a bull market, 24% of the rising wedges dropped less than 5%. That’s a huge failure rate. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): wedge, v top – extended, triangle, diamond, head-and-shoulders, broadening pattern, triple bottom.

The extended V top may be new to you. It is to me and you’ll find it on my website in Chart Patterns/V top, extended. Anyway, the head-and-shoulders bottom appears clearly formed, but price is heading down.

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?

The answers appear below and a chart on the next page.

Answer 1-3: The next page shows my notebook entry for the trade and it answers the questions

This is my notebook entry that serves as a checklist. I may look at other items not on the list, but I want to make sure I check these before placing the trade. “Date placed: 12/7/05 Order type: market Date Bought: 12/8/05 Bought at: 23.12 1) Stop, % loss: 22.41, or 3.4% 2) Volatility, stop: $0.59, 22.43 3) Upside target: 25.65, the lower end of congestion in Aug 05 4) Future market direction: Dow utilities: It has formed a small base from 11/25/05 onward after a larger basing structure from Oct '05 onward, and I think is poised to move up. The sharp down move today is worrisome as it may mean it's about to tumble. 5) Indicators: CCI bullish divergence. Bollinger: says it may continue down for a day or two before bouncing off the horizontal bottom channel line. Associated commodities: None. 6) Score and price target: -1. Target: 29.93 7) Industry and stock rank: 37/45, 11 out of 11 in the industry SAR: (support and resistance) ~25, price of the Nov 05 descending triangle, more at 25.65, price of the triple bottom in August '05, more at 27.68, congestion on the rise and fall to/from the June '05 peak. Buy reason: Big W, formed as a head-and-shoulders bottom. Yield is 4.9% at the close of 23.20. Buy again plans: 24.32, when price moves above the right shoulder, buy more.” 1, 2) Stop loss. The stop is just below the head, which has a low of 22.50. 3) The target is the bottom of the triple bottom in August. 4) See chart

Above I show the “basing structures” I mentioned in the notebook entry. This is in the DOW Utilities average. The down day I mention is the last bar shown on the chart.

5) This is a chart of the CCI (commodity channel index). The index trends up (higher lows) while price trends down (lower lows). Usually, price follows the indicator so this suggests a bullish turn in the stock.

This is the Bollinger band. Price has come close to but not touched the lower trendline, suggesting additional downside. If that’s they case, why did I buy? Because I could be wrong and it could zoom up tomorrow. I now think it’s best to wait for the turn, especially when bottom fishing like I’m doing here. However, the shape of the head-and-shoulders was so clear, I thought this to be a sure thing. Little did I know…

6) Score and price target. Using my Trading Classic Chart Patterns book’s scoring system, I found that it predicted a target of 29.93 and the probability of reaching that median rise was NOT good. 7) Industry and stock rank: 37/45, 11 out of 11 in the industry. This is a comparison of the current price with 6 months ago, sorted by the 45 industries in the list and then sorted by the 11 companies in the Eastern electric utility industry. The stock ranked dead last for performance. Is that to be expected since the stock was making a new low? Maybe.

Here’s my notebook entry for the sale “Date sold: 12/30/05 Sold at: I timed the exit and got what I thought was a good price, 22.69. Sell reason: End of year tax loss selling. This is going down, I predict, so it's time to dump it and lower my cap gains taxes. This H&S bottom didn't work as expected.” The next page shows what happened to the stock.

As you can see, the day after I sold, the stock took off, gapping upward. It figures…Notice that price stopped at the overhead resistance level, just as I predicted. And so far, the stock hasn’t closed in much on the 29.93 median rise, just as the scoring system predicted (it said the probability was less than hopeful to reach the median). But it’s early yet. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): double bottom, 3 scallops, triangle, rectangle, Big W.

Notice the two inverted and ascending scallops. Point A is much lower than B but B is only marginally lower than C. That suggests a weakening of the upward price move leading to the rectangle and symmetrical triangle. The triangle has a downward breakout. The scallops predict a trend reversal. Is the prediction correct? We’ll see. 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?

The first answer appears below and a chart on the next page.

Answer 1: If you owned the stock, then a downward breakout from the triangle would be a sell signal, the scallops provide a warning of a coming trend change. Would you risk a short sale? A further analysis follows.

The red trendline is a support line. Consider shorting the stock if price closed below the trendline. The green horizontal trendlines outline a support zone formed along the top and bottom of the rectangle. With support close to the chart pattern, a short would be a risky trade. If price reverses, it would be difficult to close out the short and make a profit. Answer 2: What is the target price? You can use the measure rule for the symmetrical triangle and that’s a good first step. Finding support zones is vital. If you can determine how far price is going down or up, then that means big bucks. Look at the next page.

Shown in red are regions that I think would support the stock. The first is the bottom of the rectangle as I’ve mentioned. The next line down connects the three minor lows in August through October. We are not dealing with individual prices but zones or areas of price support. The bottom two lines highlight a region of support with minor lows touching the bottom trendline and peaks along the top. I didn’t take much time picking the places to draw these lines, but just connected the highs and lows as an ‘internal trendline,’ as they are called. Those are trendlines that connect the bulk of the price movement and cut off the outliers, the one-day spikes where few trades occur. Price could reverse at any of these areas. Answer 3: Where is the stop price? Above the top of the triangle – that’s an easy one. If price busts the triangle (meaning the downward breakout reverses and price breaks out upward), then close out the short immediately. It means price is going higher. The next page shows how the analysis did.

When I put together a quiz, I don’t look ahead to see how price did. I make my predictions using the chart in front of me, just as you do when you look at the quiz. Having said that, notice that price pulled back to the bottom of the triangle. That might scare away novice traders but it’s expected because they occur between 40% and 70% of the time, depending on the chart pattern type (symmetricals pullback 66% of the time). Here, price bounced off the top of the rectangle and pulled back. Then it made a straight-line decline to point A, punching through the first support zone along the way. It bottomed near where I thought the second support zone would be. Since the July 2003 low, the stock hasn’t touched this support zone. The lowest it has traveled is 26.49, with the low at point A at 26.66 for reference. If you shorted the stock, where would you close out the short? Look at the next page.

I find trendlines useful. In this case, when price closed above the red down-sloping trendline, I would consider covering the short. Using the measure rule for trendlines, measure the decline from A to the trendline at B, vertically. Project the move from the breakout price upward as shown. I am using the log scale so if you physically measure the move, you should switch to the arithmetic scale so vertical distances are the same. That gives a target price showing how high price might move. It suggests that you close out the short now or suffer the consequences. The end

Bulkowski’s Trading Quiz Instead of the usual quiz, I thought I’d review mistakes plus a short quiz and an actual trade.

Review and Mistakes

The above chart shows two patterns, one without the trendlines drawn. The image on the right isn’t a descending triangle because it contains too much white space. This is from Yahoo, May 05 onward. Compare the image with the following one.

Notice that the above pattern doesn’t have much white space. Price crosses the pattern from high to low often, touching each trendline plenty of times. This is a perfect example of an ascending triangle. This is from Tultex (TTX) July to Sept 95.

The above example shows the raw chart on the left and an attempt to create a descending triangle from the image on the right. Notice that the pattern has three trendline touches on the top, called minor highs – peaks. The middle valley is called a minor low as the left image shows. Do NOT draw a horizontal trendline from the start and end of the daily price data and call them minor lows (as the arrows on the right image shows). Those end points don’t stop at valleys. They are not minor lows even though the daily bar has a low on those two points and they happen to touch the trendline. They do not count as touches. The triangle needs at least TWO minor high touches of the top trendline and TWO minor low touches of the lower trendline. The above chart shows only one minor low touch of the lower trendline. Thus, it’s not a descending triangle. This also applies to other chart patterns: most need at least two or even three trendline touches using distinct peaks and valleys.

Quiz Below is the weekly chart showing a symmetrical triangle. The partial decline suggests an upward breakout. Imagine that you buy the stock.

The next chart shows the daily scale.

This is the daily chart showing the partial decline. What do you do with the stock? You already own it. Do you sell, hold, or buy more? My answer is on the next page.

This is the chart of EMC. I show the buy and sell points for my trade. Here’s my notebook entry for the trade. “Date: 7/6/05 Trade time: at market open tomorrow Filled at: 14.22 Stop: 13.33, or 6% down Upside target: 18 Future Nasdaq direction (guess): Up Buy reason: A perfect cup with handle. I'm buying before confirmation because I feel strongly about this one. On the weekly chart, the Jan 05 peak pokes through a long term down trendline. If this stock can finally push through that resistance, the sky's the limit. I might buy more if that happens. Score +3 for 18.19 target. Only 2 problems: a weak market and lack of confirmation yet. Before the open on 7/7/05, terrorists exploded 4 bombs in London. I thought that would cause the stock to gap lower on the open and then recover through the day. It turns out I was right as I got a fill (14.22) much lower than yesterday's close (14.48). Date: 7/13/05 Trade time: 11:06 Filled at: 14.51 Sell reason: I believe this has formed a lower high. That suggests a short-term trend change. Since I have a profit, I thought I'd cash out now and wait for it to go down then recover. When it breaks out of the long term down trendline then it might be worth another look.” This was a hunch that worked out. If I held on, I’d be looking at four digit loss (if I sold at the low) instead of the three digit profit I made. The end.

Bulkowski’s Trading Quiz

This is a complicated screen but you can see the cup with handle forming from Dec to June and the handle after that. My guess is that this one will fail. Cups have a strong tendency to rise 10% or 15% after the breakout and then tank. That may happen here. Look how timely the pipe bottom in August 2004 was… The green Bs and red Ss are buy and sell transactions. The next page shows the weekly chart.

There’s the symmetrical triangle I was talking about. IF price can pierce the top trendline then this could be a winner. Here’s my notebook entry for each of my trades. They will give you an idea of how I think. Date: 8/26/04 I placed an order to buy at 11, stop. The stock is moving sideways, consolidating, and it's a shark32 pattern. I am hoping for an upward breakout from this congestion region. Fundamentals are with me as price has been climbing with brokers recommending the stock. The last earnings report was a good one. Trade time: (unfilled day order only) Filled at: Not filled Stop: 9.93, below round number support and outside of the .37 volatility. Upside target: Future S&P direction (guess): Upward if the upward breakout from a descending broadening wedge holds. Otherwise, it'll tumble to the other side of the wedge and this trade will likely fail. Buy reason: pipe bottom. Date: 8/30/04 Filled at: 10.53 Stop: 9.91, a loss of 5.9% Upside target: 12, overhead resistance Future S&P direction (guess): upward, breaking out of a descending broadening wedge Buy reason: pipe bottom with lots of support at 10.50. Market may be choppy going into September, DJIA is down 20 points as is Nasdaq. Large dip down washed out the sellers and a small shark-32 pattern/symmetrical triangle suggests price is going to breakout soon. Volume has been sloping down, supporting the coming breakout. Hope it's to the upside. 9/14/04 Stop raised to the buy price of 10.53 today. 9/21/04 I canceled the stop because it was too close. This stock has thrown back and is searching for a reason to go higher. I may buy more and don't want to get stopped out on a brief dip. Date: 9/21/2004 Shares: Bought less than normal because this may confound me and move lower. It is having difficulty moving up, so it is not acting exactly as expected.

Filled at: 10.96 Stop: 9.91. Placed 9/21. Upside target: Same as above Future S&P direction (guess): Upward Buy reason: Buy after throwback. This is another opportunity to buy in. The Fib retrace from 8/13/04 to 9/14/04 at 38% supports the current price. 9/30/04 Stop raised to 10.48 after the close 11/17/04 Stop raised to 12.47 12/2/04 Stop raised to 12.83 12/16/04 Stop raised to 13.53 1/13/05 Stopped out at 13.53 in general market weakness since 1/1/05 Date: 5/2/05 Filled at: 13.13 Stop: 12.71, not placed Upside target: 14.44 Future S&P direction (guess): Up, both S&P and Nasdaq after hitting a support zone. Buy reason: Earnings flag trade. Intraday, just as I was changing the bid from 13.11 to 13.13, the price dropped to 13.11 and is now at 13.06. Rotten timing. I new that if support broke at 13.13, the price would drop which is why a bid at 13.11 would be a mistake. If they took that, the price would likely continue down. I wasn't sure that 13.11 would ever hit, so I moved it up .02. 5/4/05 Stop placed at 11.94, below the 62% retrace of the prior up move from it's start (11.10 on 4/15/05) to the flag high at 13.47 on 4/22/05. 5/8/05 Stop raised to 12.17 5/13/05 Stop raised to 12.91, just below the flag apex. 5/19/05 Stop raised to 13.23, just below Fib retrace of 62%. Date: 5/26/05 Trade time: market open Filled at: 14.15 Sell reason: I think this stock has peaked, short term. MACD says momentum turned lower today (5/25). It's fulfilled the flag measure rule and is butting up against overhead resistance coupled with a Nasdaq that's poised to tumble. I want to take my $ and exit. Stat! Date: 7/6/05 Trade time: at market open tomorrow Filled at: 14.22 Stop: 13.33, or 6% down Upside target: 18 Future Nasdaq direction (guess): Up Buy reason: A perfect cup with handle. I'm buying before confirmation because I feel strongly about this one. On the weekly chart, the Jan 05 peak pokes through a long term down trendline. If this stock can finally push through that resistance, the sky's the limit. I might buy more if that happens. Score +3 for 18.19 target. Only 2 problems: a weak market and lack of confirmation yet. Before the open on 7/7/05, terrorists exploded 4 bombs in London. I thought that would cause the stock to gap lower on the open and then recover through the day. It turns out I was right as I got a fill (14.22) much lower than yesterday's close (14.48). Check with your tax adviser before taking the following as gospel as tax laws change: This is my interpretation. Let’s talk about the wash sale rule. ‘The wash-sale rule applies if within 30 days before or after the sale of stock or other securities showing a loss you buy "substantially identical'' stock or securities.’ If you own 100 shares of IBM at 30 and it cost you 100, you can’t buy another 100 and sell the original ones tomorrow and take a loss

deduction. Likewise, you can’t sell your 100 shares then buy it again within 30 days and take a loss deduction on your taxes. Some traders are exempt from this rule.

Knowing that, I decided to sell my EMC holdings for a small gain (1.9%). Why? The peak at B is below A and that usually suggests a trend change. If price can’t rise above the prior high, then price will fall back. If it does, I’d take a loss. Although I think EMC is a good buy, I didn’t want to suffer through a massive loss plus wait 30 days before I could buy again. This way, I capture a small profit and I can buy again immediately should price continue higher. Here’s my notebook entry for the trade. Date: 7/13/05 Filled at: 14.51 Sell reason: I believe this has formed a lower high. That suggests a short-term trend change. Since I have a profit, I thought I'd cash out now and wait for it to go down then recover. When it breaks out of the long term down trendline then it might be worth another look. The End

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): flag/pennant, 3 broadening formations, rectangle, 2 scallops, double bottom.

The broadening top has a partial decline in the shape of a flag. A partial decline correctly predicts an upward breakout 72% of the time in a bull market. The bottom of the flag corresponds to a 38% retrace of the move from A to B. The breakout from the flag is upward.

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?

The answers appear below and a chart on the next page.

Answer 1: With price moving up after bouncing off the 38% Fib retrace and breakout of the flag, it’s an early buy signal. Answer 2: Compute the height of the broadening top (the difference between B and A) to get a height of 8.22. Add this to the top of the pattern, A, to get a target of 53.92, which is conveniently below the 54 round number. Answer 3: Volatility is $1.76 so place a stop no closer than 42.24 (the low on the last day shown is at 44). That is below the bottom of the flag and it’s a good stop location. That would mean a potential loss of 6%.

A buy order was the correct choice because the stock continued to move up. As the blue trendline shows, price lost momentum and broke through the trendline near the top of the chart. A shorter trendline, shown in green, also shows price breaking down. Question: Do you buy more, sell, or even short the stock? The next page shows a new chart and the answer.

This chart is somewhat complicated but focus on the green pointer on the left. It shows where we left off from the last chart. Price gapped downward but found support in the low 50’s and formed a double bottom/symmetrical triangle. Price broke out upward and continued its bull run. If you sold the day after the gap down, you would have been filled between 55.45 and 56.70. The low a few days later was at 52.80, so you would have been selling near the low. I believe that selling is the proper course of action. After all, price often continues dramatically lower. If it had continued down to 25, how would you feel if you sold at 56?

The next page shows you a trick that’s rarely used but it works 63% of the time, according to a study of trendlines I did.

The measure rule for trendlines: Find the widest distance from the high to the trendline before the breakout but AFTER the most recent trendline touch. I show that as the red line AB. Subtract the height from the breakout price, C, to get a target. In this case, the measure rule worked because price dropped more than the height, so it may serve as the minimum price move to expect. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 triangles, wedge, broadening formation, double bottom and top, 2 scallops.

Please forgive how my computer drew the blue lines, but you get the picture. Price has broken out downward from the broadening formation in March 2005. It has also confirmed the Eve & Adam double top, suggesting a downward price trend. 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?

The answers appear below and a chart on the next page.

Answer 1: Since the breakout is downward, short the stock but recognize that when price hits the ascending triangle, it’s likely to reverse. That doesn’t leave much of a profit opportunity. Answer 2: I’d use underlying support as the target – the top of the ascending triangle. Answer 3: The top of the broadening pattern is 9.8% away. That’s just inside the 10% or less that I like to see for a stop, so that’s where I’d place it. It still seems unusually far away, though.

You can see that price moved up after the breakout in a pullback attempt before resuming the downward move. Price hit a support layer setup by the large ascending triangle and the decline stopped. Price made a nice uphill run after that. Price didn’t actually reach the top of the triangle at 24.17 but dropped to a low of 24.83. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Big M, 2 double tops, broadening pattern, wedge, triple bottom, pennant.

The earnings flag isn’t a flag at all but a pennant. Nevertheless, that’s what it’s called. Price has broken out upward from the pennant.

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?

The answers appear below and a chart on the next page.

Answer 1: Earnings flags are the best performing event pattern. Buy. Price must make a large intraday price swing or gap higher as shown here. Answer 2: See my notebook Answer 3: See my notebook on the next page.

Here’s my notebook entry for the buy. “Date: 5/19/04 Filled at: 43.989 Stop: 40.03, a loss of 9%. Placed 5/19/04 Upside target: 46 as per MMU from 36 to 42, then 40 projected upward Mood (will trade work? Bought too soon?): pissed that GI trade was stopped out but confident of this one. S&P direction over pattern lifetime: Downward for last 1.5 months Future market direction (guess): Up. It's finding support at the last recent minor low. Market is nervous over oil price and inflation, rising interest rates looming. Buy reason: Earnings flag and stock is moving higher as market is going down. Nice flat base at 38 and 41.” I show the measured move up (MMU) pattern in red on the above chart. In theory, the second leg is supposed to copy the move of the first leg. The S&P chart appears on the next page.

The red line shows the downward price trend I spoke of. The green lines show underlying support. The top green line is just below the 38% Fibonacci retrace of the move from A to B, suggesting price might reverse and move up, as I wrote in my notebook. More on the next page.

Here’s the price of oil. At the time I bought, you can see that it was on a steady climb since the September low.

This is the flat base at 38 and 41 my notebook refers to.

This is what happened to the stock over the coming days. The red circles show the stop locations that my notebook entry details. “5/26/04 Stop raised to 42.37 6/2/04 Stop raised to 43.73 6/16/04 Stop raised to 45.87 6/28/04 Stop raised to 46.73 7/1/04 Stop raised to 47.33 7/16/04 Stop raised to 48.43” Most of the circles correspond to new highs in the stock. As price climbed, you can see that the circles became bunched. I grew more concerned the higher price climbed. Question: Is it time to sell or hold on for additional gains? I show one answer on the next page.

Here’s my notebook entry for the exit. “Date: 7/21/04 Filled at: 49.022 Mood (sell too soon?): Yes, at least intraday as price rebounded after I sold. In the short term, I see market weakness and weakness in this stock. It is struggling to get above 50 and stay there. I expect another decline then a retry at the top Sell reason: The market is up 88 points and this is down 82 cents. All the other stocks in my portfolio are up today. That signals a trend change. The rate of change (ROC) oscillator has been trending down for months now (since April), diverging from price and I see momentum lessening. It may be that I want to protect my profits after two recent losses. Earnings are due in August 6. Yeah! I just logged in and the stock closed 2.64 lower! I got out just in time and the DJIA was down over 100.”

The next page shows the rate of change oscillator.

I made over 11% on the trade. Notice that even though the indicator signaled divergence (lower highs on the indicator but higher highs on the stock), I bought and made money. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): rising wedge, head-and-shoulders, double bottom, and 1 pipe but it’s on the weekly scale.

Let’s say you bought near 16. You’ve made a bundle when it topped out at 46, but it measured move down since then (Dec peak to the Adam & Eve double bottom (AEDB) low, the stair step decline. This would become a Simple ABC correction if price closes above the Dec peak, but it hasn’t yet), bottoming at the AEDB before recovering to form a head-and-shoulders top. Question 1: What alerts you to potential weakness? Question 2: If price should drop, how far is it likely to fall? The answers are below. A chart of copper prices appears on the next page.

Answer 1: The stock tried to make a new high but failed. That in itself shows weakness. Combined with the head-and-shoulders top, it suggests price may drop more than expected but that’s just a guess. Answer 2: Measure the height of the head-and-shoulders from the head (44.86) to the neckline directly below the head (39.59), vertically, then project the height (5.27) downward from the price where the stock pierces the blue neckline (39.85). That gives a target of 34.58. That’s a decline of 13%. Next, look for support zones. One appears

at 35, corresponding to the bottom of the AEDB. Look for price to stall or reverse there. That’s also close to the target price.

This is the price of copper over the same period as the last chart. Price has moved up to a recent price of $1.36 from a low in April of $0.71 or so. It has also made a lower high, suggesting weakness. The following are charts from the other stocks in the copper industry. Look them over. Notice many peak in January.

All of the above charts show that price has peaked and is now moving down. Phelps Dodge (prior page) also shows a head-and-shoulders top, not confirmed yet because price hasn’t dropped below the right armpit. It’s possible that these charts, like PCU above, will double top – climb back to its old high because it appears to be turning after finding support at the congestion region outlined by the blue lines in November. That looks like a

diamond top outlined with 2 additional lines for some reason. The lines in red are from my pattern recognition program suggesting additional patterns, mostly ascending triangles and a high and tight flag (HTF).

Look back at page 2. The stock shows a confirmed head-and-shoulders top. Question: After looking at the price of copper and other stocks in the same industry, do you sell your holding? Do you short? The next page shows what happened to the stock.

The stock pulled back to the neckline before continuing down to a low of 27.76 before recovering. The decline from the breakout was 30%. Price did pause at the bottom of the AEDB at 35, but only for a week or so before continuing the slide. Taken together, that’s how I decide whether to sell or not. I look at others in the same industry, check relevant commodities, and make my decision. The end.

Bulkowski’s Trading Quiz Here’s the latest quiz. What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): triangle, 2 wedges, big W based on a double bottom.

Toward the end of last year, I fell in love with Big W chart patterns. These are usually double bottoms (DB) at the bottom of a steep downtrend. The theory is that the right side will mirror the decline on the left. It might not be as steep but it’s the length of the rise that can be tasty. I consider other patterns besides a DB to be valid reversal patterns. I just look for a tall left side with little congestion along the way lower as keys to this pattern, BUT, I really haven’t spent the time studying it. That’s not good news when money is on the line. Price has pushed above (but not closed above) the confirmation price, the highest high between the two bottoms. 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?

The answers appear on the next page.

Since this is an actual trade, here’s my notebook entry. “Date: 10/13/05 Bought at: Buy stop at 21.70, a penny above the confirmation price of 21.69. Placed after the market closed Stop: 1.5x vol 81 cents so a stop at 19.33 would work (below lowest low). That'a loss of 10.9%, which is a bit on the steep side. But since the market is trending down, it might be a smart play.

Upside target: 25.50 to 26 for a Big W rise, the site of overhead resistance in July. Future S&P direction (guess): Down until it finds support shortly at the April lows of 1136. Buy reason: AEDB. MACD and RSI have bullish divergence with the stock. This stock has been hit (22 stores closed by Katrina), so rev will be down. Earnings came in a few days ago and net sales as of 10/6 were up 9.3% for 5 weeks ending Oct 1, same store sales up 2.6% for the period. Book score +2. 10/14/05 The buy stop triggered today. I at 21.70 -- 21.71.” At the time I placed this trade, I still calculated a volatility stop using a multiplier of 1.5 instead of the 2 I use today. A vol stop is useful because it helps prevent you from being stopped out on normal price volatility. Take the high-low difference of daily prices over the last month and average them, then multiply by 2. Subtract the result from the current day’s low to get the stop price. The upside target was chosen because that’s near where the Big W starts, also a position of likely resistance. It’s closer to the bottom red trendline than the blue line just above it in the prior chart. Indicators: MACD and RSI. See a chart of the RSI indicator on the next page.

Here’s the divergence I mentioned in my notebook. Price shows lower lows but the indicator shows higher lows. It’s bullish divergence because price usually follows the indicator, higher in this case.

This is the MACD histogram (moving average, convergence/divergence). It also shows higher lows while price is making lower lows. “Book score +2” That’s a reference to my Trading Classic Chart Patterns book. Scores above 0 tend to meet or exceed the median rise. Scores below 0 tend not to climb to the median and should usually be avoided. It’s been a while since I talked about the scoring system, here’s how I got the score. This is based on performance tests and statistical review for the Adam and Eve double bottom. 1. The trend start is long term, starting at the peak on 2/2/05 for a +1 score. 2. Flat base: Price does not start from a flat base, so that’s worth -1. Total: 0 3. Horizontal consolidation region: I always consider one to be in the way of a price rise, so that scores +1, oddly. It’s the only double bottom where overhead resistance is good news. Go figure, but that’s what the statistics say. The HCR is at the start of the Big W. Total: +1 4. The breakout is the top of the chart pattern and that price is within a third of the yearly low for a +1 score. Total: +2 5. Height. The pattern is short when compared to the median height divided by the breakout price. Short patterns score -1 for a +1 total. 6. Linear regression volume trend from start to end. It’s rising for a -1 score. Total: 0. 7. Breakout volume: The breakout occurs when price closes above the top of the chart pattern. On that day, volume was high (+1) but not on the day I bought. Score: -1: Total: -1. 8. Throwbacks hurt performance and I always assume they will occur. Score: -1. Total -2. 9. Bull traps. When price rises less than 10% and then plunges below the bottom of the pattern, that’s a bull trap. They rarely occur, and I didn’t think it would happen this time. Score: +1. Total -1 10. Did a gap occur on the breakout day? I don’t know because I bought before it officially broke out. There was no gap on the day I bought. Score: +1. Total: 0 11. Market trend. The S&P climbed from the dates of the two double bottoms for a -1 score. 12. Market cap: with a breakout price of 21.63, I multiplied this by the number of shares outstanding and found that the company is a mid cap, $1b to $5b in market value. That scores +1 for a 0 score. I calculate a 0 score but my notebook entry says it was +2. I may have guessed that on the breakout day volume would be higher than average (which actually happened). That would change the score to +2. I based my buy decision on the scoring system predicting price would meet or exceed the median rise of 26.21%. That would put the target at 27.37. Here’s the next notebook entry

“10/17/05 Stop placed at 20.32. This is a volatility stop because one placed below the double bottom low was too far away and the stock is up this morning. It would have to fall 6% to trigger it. I used the low on 10/14/05 at 21.13 - 0.81 to get 20.32.” A chart follows on the next page

“Date: 10/20/05. Placed after the close today, for tomorrow's open. Bought at: 22.78 on 10/21/05, market open Stop: 20.32 Upside target: 25.50 to 26 Future S&P direction (guess): Down for a few days then rebound Buy reason: Good upside breakout from the double bottom especially coming on a day when the Dow was down 133 points. I wanted to add more to my position because I think this will Big W move up to 25.50 to 26. I don't particularly like the company or its prospects but I do think the Dow will recover tomorrow and help keep this stock moving up.” I bought the stock a second time as the chart shows. It also shows the stop price, in green.

The next page shows yet another chart!

“10/21/05 I replaced the stop at 20.32. 11/3/05 Stop raised to 20.71 after the market closed. 11/7/05 Stop raised to 21.69, below the 62% Fib retrace and at the Sept 9/9/05 high exactly. 11/10/05 Stop raised to 21.93 after the stock moves up almost 5% in one session, to a new minor high. I'm keeping it below the 62% Fib retrace value. 11/28/05 The stock has closed lower 4 days in a row, so I expect a rebound despite breaking out downward from the diamond top. I hope price will bounce off the up-sloping trendline drawn from the Sept bottom upward. This still has upward potential, so it's worth holding. 12/8/05 Stop raised to 22.33, just below the descending triangle that formed. It's the smart play.” Date placed: 12/8/05 Date sold: 12/9/05 Sold at: 22.33, the stop price Sell reason: hit stop. I raised the stop because I felt a downward breakout from the descending triangle would mean a giveback of any gains.” The horizontal red lines show the approximate start dates and price level of the stops. When price made a new high, I raised the stop. I moved up the stock to the base of the descending triangle on the belief that if price pierced the lower trendline boundary, it would continue lower. It did but only for a few days before moving up smartly. I made a massive profit of about 1% on the trade. Oh well. The scoring system was correct. Price reached the median rise of 27.37 on the last bar shown on the chart. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): a double top, broadening wedge, 2 islands, scallop, diamond, triangle.

Notice how the symmetrical triangle and the wedge form near the same price level. These types of “mirrors” are quite common. Price has pulled back to the broadening wedge. 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?

The answers appear below and a chart on the next page.

Answer 1: CONSIDER shorting once price turns down. Answer 2: Since “mirrors” seem to work well with this stock, look on the left side of the chart for a target price. The island top and the valley to the immediate right of it I would use as my target. That would be a low of 76-77, at point A. That’s near a site of congestion. Answer 3: The stop depends on how far up price moves. If it goes NO higher, then the combination of the long island and broadening wedge mirrors are wonderful resistance areas. I would expect price to reverse there. Thus, I’d use the top of the current price peak, about 86 (point B) as the stop price.

This is a chart of the future price action. Point B is the suggested stop price once it was clear price was moving down. That didn’t happen until price closed below the symmetrical triangle. Point C is a fake breakout (actually, an upward breakout occurred the day after C when price closed outside the triangle borders. Then price busted the pattern (meaning an upward breakout that moved little higher before tumbling and closing below the bottom of the chart pattern. When that happened, it was the sell short signal, and I show it as the green line. Price hit the target range: 76-77. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 1-3 flags, double bottom, 2 triangles, head-and-shoulders, broadening pattern.

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?

The answers appear below and a chart on the next page.

Answer 1: Sell or short the stock because the breakout is downward. Answer 2: Measure the height of the head-and-shoulders and project the result downward from the breakout price. But where’s the breakout price? With down-sloping necklines, if they are steep enough, you won’t have price piercing the neckline. So, I use a close below the right armpit as the sell signal. The target in this example would be: (peak) 78.05 – 71.18 (neckline) = height = 6.87. (RS low) 70.07 – 6.87 = 63.20 is the price target. Price reaches the target just 55% of the time, so be conservative in your estimates. Answer 3: Volatility is 1.93. Adding this to the intraday high of 70.34 gives a stop of 72.27. That’s the closest the stop should be. That places it in the middle of the flag that appears between the head and right shoulder. For safety, I’d probably place it above the right shoulder. That would mean a potential loss of 8%, which is reasonable.

This shows what happened to the stock. It continued lower until finding support at the triple bottom, 64.84 at its lowest. So, the stock missed the 63.20 target but with 55% meeting the target, that should not be a surprise. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 double bottoms, big W, flag, 2 headand-shoulders.

The complex head-and-shoulders bottom (chart center) has a dual head (the Adam & Adam valleys) with nearby shoulders LS and RS. The red line on the Adam & Eve double bottom shows the confirmation price. If you placed a buy stop at that price, you would have bought in at the breakout. If you waited for price to close above the confirmation point, you would have remained out of the trade for at least another day because price closed below the red line on the day it gapped upward (meaning the pattern was NOT confirmed). The next day (the last one on the chart) is the first day price closed above the confirmation point. That would have been the buy signal and you would place a buy order the following day. 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?

The answers appear below and a chart on the next page.

Answer 1: Buy the stock because it has an upward breakout. However, the risk is increased because price has climbed far from the breakout price. If it throws back you could be cashed out and suffer a loss even though the chances are 86% that price will resume the upward move. If this were my trade, I would skip it or wait for a throwback because I’m too late getting in. Answer 2: Measure the height of the chart pattern and add it to the confirmation price to get a target of 58.14, which price reaches 66% of the time. Answer 3: Volatility is $1.89 so a stop no closer than 55.18 – 1.89 = 53.29 would keep you away from being stopped out on normal price fluctuations. That’s measured from the current low and that’s slightly above the confirmation price (red line on the chart). Since price is on a straight-line run, I would use a 62% Fib retrace as the stop point. That would place the stop at 51.50 which is 62% of the rise from the Eve bottom. That would put a potential loss at 9% as measured from the most recent closing price.

I show the confirmation price as a red line, the target as the blue line, and show that price did not throwback. Thus, I would not have bought this stock unless I had a buy stop at the breakout price. Anyway, price has formed a small ascending triangle. Question: If you owned this stock, would you sell or hold on for additional gains? The answer appears below.

Answer: Since the breakout is downward, that’s a sell signal. I would sell. However, if you were to short this stock, how far would it drop? Measure the height of the triangle from the top trendline (65.35) to the lowest valley (62) for a height of 3.35. Project this downward from the breakout price (63.45) to get a target of 60.10. That’s a potential decline of 5%. Price reaches the target 54% of the time in a bull market. Is a 5% decline

worth selling your stock? Is it worth shorting the stock? The next page shows the chart and the price action answers those questions.

As the above chart shows, the stock dropped to a price of 59.01, beating the 60.10 price target handily. Nevertheless, that’s a decline of just 7% and that’s if you traded it perfectly. My belief is that if you sold this stock short, you would have taken a loss. If you sold a long holding, you would have watched from the sidelines as price climbed to a high of 78.05 by November. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): rectangle, 2 triangles, broadening pattern, triple bottom, head-and-shoulders, and a flag.

Depending on how you draw the top trendline, the symmetrical triangle has broken out upward near its yearly high. The channel trendlines suggest there is more price upside. Do you believe it? Question 1: Do you buy or sell short the stock? Question 2: What is your price target? Question 3: What is your stop loss price?

The answers appear below and the following price action appears on the next page.

Answer 1: Since the breakout is upward, buy the stock. Answer 2: Use the measure rule for a symmetrical triangle. Measure the height and project upward from the breakout price. The height is the lowest low (83.50) subtracted from the highest high (88.90) for a height of 5.40. The price at which the stock pierces the top trendline is 87.85 for a target of 93.25. Price meets or exceeds the target 66% of the time, so be conservative (use a closer target) in your guess. Answer 3: Use the minor low at 84.57, call it 84.47 to remove round number (84.50) support from the picture. That would give a potential loss of about 4%, which is very good.

Price took off and reached a high at 100.92 where it retraced about 63% of the move up from the stop loss point (the minor low before the triangle breakout). Price formed a second top and now appears to be heading down. I kept the channel lines in place just to show what happened. When price moves away from a trendline, that means it’s gaining momentum. When it’s heading toward a trendline, that means momentum is decreasing. Question: If you own the stock, do you sell, buy more, or wait for it to bounce off support before adding to a position? The answer appears below and a chart on the next page.

Answer: Sell. The next page shows why.

The stock formed an Eve & Eve double top, confirmed when price closed below the valley between the two peaks (confirmed at the far right shown in the prior chart). Price continued down as you can see, but it did find support at the symmetrical triangle and formed an ascending broadening wedge in May. The end

Bulkowski’s Trading Quiz This stock has split its shares and my program has a bug in it such that it didn’t split the opening price. Thus, the opening is pegged at the intraday high. Ignore it. What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns: head-and-shoulders, at least 2 scallops, triangle, simple ABC correction (2 really), and the start of a measured move up.

The stock has broken out upward from the simple ABC correction, suggesting good gains ahead. The green line highlights the measured move up chart pattern from EAC and higher from there.

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?

The answers appear below and a chart on the next page.

Answer 1: Since the stock has climbed above the top of the corrective phase of the measured move up (part of the simple ABC Correction, the peak at D), that’s the buy signal. Answer 2: Use the measured move up (MMU) to predict a target. The height from E to D is 57.59 (D) – 36 (E) = 21.59. Since the MMU measure rule works just 38% of the time, let’s multiply the height by 38% to get 8.20. Add this to the corrective phase low at C (48.66) to get a conservative target of 56.86. If you look at the chart, price has already hit the target! If we use the full height we get a target of 70.25, about $10 above where it’s trading now. Answer 3: What’s the stop price? Let me answer that in my notebook entry that follows on the next page.

“Date: 9/8/05 Filled at: 58.77. I used a limit order to buy. Stop: None. Buy more if it hits 50.10. 50 should be a support zone. Upside target: 65.79. Using a MMU measure rule, it's 57.59 (8/2) - 36 (4/11/05) = 21.59 x .38% accuracy = 8.20. From the high on 8/2 that's a target of 65.79. Future S&P direction (guess): Up Buy reason: Simple ABC Correction and Fundamentals. With hurricane Katrina chewing up 90,000 square miles of Alabama, LA, and Miss, I figure they will need a bunch of concrete, which the company provides materials for. This should be a holding of 2 to 3 years, not a quick in-out play. Put a stop, but consider buying more if price drops substantially. Intraday, the stock made a higher high so I knew price was trending up even though it was below the prior day's close of 59.80. It's now 59.18, moving up. As to the ABC correction, this is the second one in the price trend, so that makes me nervous. Plus, I'm way late getting into the trade. I should have bought over a week ago just after the hurricane struck.” I considered this a long-term trade, so I was willing not to use a stop. My bet was that 2 to 3 years down the road when I sold the stock would be substantially higher, handling business from the hurricane recovery which will be in full gear by then. Whether this is still true remains to be seen. For short-term traders, volatility is 2.81, so a stop no closer than 57.87 (the current low) – 2.81 = 55.06 would work. That places the stop slightly below peak B. I think that’s too close. I’d probably place it below A, at about 52.63 for a potential loss of 9%. As to the target, you’ll notice that I used the high at D and projected upward. I did this because price had already met the target (answer 2). The warnings I issued in my buy reason – getting in late and a second simple ABC correction – are red flags to the trade. Getting in late means smaller profits or even a loss unless you can price it at a better entry. For me it usually means lower profits. With 2 ABCs (the first begins at the May 04 low on the chart, simple ABC correction at the head-and-shoulders to point E, and upward to D) occurring, how much higher can the stock go? Plenty if my fundamental analysis is correct. Some will recognize this as scenario trading, something I warn traders against doing. I tried it here and we’ll see how it turns out. Scenario trading is investing in an idea you firmly believe in. In this case, that’s Hurricane Katrina chewing up foundations, roads, and bridges coupled with a shortage of concrete already, it’s an easy score. Or so I thought. Other investors thought so because the stock has climbed from the low of about 25 at the start of the chart to a recent 60+. Wish I had a piece of that… The next page shows another chart.

After the buy, price dropped for a few days despite my confidence that it would rise. Nevertheless, price climbed to peak at A, hitting 67.98, exceeding my notebook target of 65.79 and falling just pennies short of the 70.25 full height target from answer 2. The log scale makes the distance appear smaller… Since peaking at A, price has moved down steadily and has now closed below the trendline I show starting in April. The stock has bottomed at 53 and closed at 55.40. Question: Even though this is a long term holding, do you buy more, sell, hold, or even short the stock? My answer appears on the next page. “Date: 10/27/05 after mkt closed Sold at: market open Sell reason: This was a scenario trade gone bad. Although I think this stock has promise long term, short term it's going down. It has closed below an up-sloping trendline formed along the bottoms from 4/18/05 to 8/26/05 to today. Time to get out. The general market is in a downtrend now, so I'm limiting my exposure.” Here’s the chart since then.

I decided to cut my loss and sell at the market open, filled at 54.07, losing 8% on the trade. That’s certainly better than riding it down to a recent low of 49.20 (16% loss). I can always buy back in if I think the concrete business isn’t getting stoned any more. [Subsequently, the stock bottomed at 45.30, recovered to 65.53 and then plunged, reaching a low of 35.71 in August 2006.] The lesson I learned from this trade is that it pays not to ignore long-term holdings. Even though the stock may recover in a few years, it may not, especially if you sell your losses at tax season (which I usually do). Use a stop to limit losses even in long-term trades unless they are near to going from a short-term holding to a long-term one. Then, holding on may make sense for tax reasons. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): Look for 2 head-and-shoulders, 2 triangles, 2 scallops, simple ABC correction.

The simple ABC correction begins at the March head, drops to the neckline then up to the right shoulder, and completes at point A. Question 1: Would you buy or short the stock? Question 2: What is your price target? Question 3: What is your stop loss price? The answers appear below and a chart on the next page.

Answer 1: Price is in the process of pulling back to the neckline. As with most pullbacks, price will continue back down something like 87% of the time. If this were my stock, I would not trade it yet until the final direction becomes clear. I would expect price to tumble again once the pullback completes. Answer 2: By looking at the height of the head-and-shoulders top from the head (43.80) to the neckline (39.66), vertically, and extending the height (4.14) down from where price pierces the neckline, it appears the down move has already hit the target. A check of the numbers shows that’s the case. Price approached the 35.52 target when it bottomed at 36. It’s now on its way back up, but it’s too soon to tell if the price (after the pullback) will continue back down. However, the company announced earnings on this date and the market reacted with a good up move. Answer 3: If I had shorted this stock, I would draw a down-trendline from the head to the right shoulder peak extended downward until it intersected price. When price closed above this trendline, I would close out my

short. Also, since the company announced better than expected earnings, it might be time to close the short just on the fundamentals.

Price has closed above the top of the head-and-shoulders top so any short position in the stock should be closed out by now. Question: Do you buy or short the stock? The answer appears below and another chart on the next page.

Answer: Buy. Never short a stock making a new high, especially after an earnings surprise. The stock has completed the simple ABC chart pattern and it’s time to buy. You can also use a measured move up chart pattern to compute a price target. The first leg is from A (in May ’04 at 23.93) to H (43.80), corrective phase from H to B (36), and B upward for the second leg. The length of the first leg is an indication of the length of the

second leg. The first leg length is 19.87. Take half of this (9.94) to be on the safe side and add it to the low at B for a new price target: 45.94.

As the chart shows, price paused at the 45.94 target before continuing the move up. Using the full first leg height gives a target of 55.87 which price also pierced when it topped out at 60.50. The stock has formed another simple ABC correction recently, suggesting additional gains ahead. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): broadening formation, high and tight flag, failed big W, head-and-shoulders, double bottom.

The failed big W are the two Ws that don’t line up (they are supposed to in a working pattern). The Adam & Eve double bottom didn’t work well. The two parallel lines on the right are a high and tight flag (HTF). Price moved from 6.71 to 13.08 in just over a month then backtracked and it looked like it was breaking out of the flag portion of the HTF. Question: How do you trade the HTF pattern? The next page shows the price action and how I traded it. This is from my trading notebook. Date: 12/23/04 Trade time: open Filled at: 11.69 Stop: 10.33 Upside target: 15 Future S&P direction (guess): Up Buy reason: High, tight flag with upward breakout as oil prices drop. A HTF is supposed to have a large up move – about half the length of the prior uptrend. That would mean a 3point move up from the low of 10.73. That’s about a 30% climb. I felt it was worth the risk. Here’s the price action to the next point.

Clearly the airline was not cooperating as price tumbled instead of taking off. What do you do now? Price looks like it might find support around the round number 10, which also corresponds to the consolidation region in early November. Question: Do you hold on a bit longer, sell, or maybe even buy more (averaging down)? The next page shows what I did.

Date: 1/4/2005 Filled at: 10.334 Sell reason: Hit stop on market sell off. The stock hit my stop loss order and I was taken out for a loss of about 12%. Ouch. The good news is it could have been worse. I could have sold near the triple bottom low of about 8. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): rectangle, high and tight flag, scallop, pennant, triangle, head-and-shoulders.

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, the chart looks like a Big W 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.

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?

The answers appear below and a chart on the next page.

Answer 1: Buy because of the upward breakout. Answer 2: Look for overhead resistance. I show that on the next page.

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 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 74% of the time. To be more conservative in your target, multiply the height by 74% to get 2.70 and add this to the breakout price for a new target of 9.30. I show that location in red on the chart. Answer 3: What’s the stop price? 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. 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.

The next page shows what happened.

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. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): double top, wedge, rectangle, triple bottom, triple top.

A and E is an Adam & Eve double top even though the decline between the tops isn’t 10%, the minimum required for them. The triple top in June/July doesn’t confirm so it’s not a triple top. That means price never closed below the lowest low between the three peaks, so it’s just another 3 bumps on the price chart. The stock has broken out of the rectangle and confirmed the triple bottom. 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?

The answers appear below and a chart on the next page.

Answer 1: Upward breakout: buy. Answer 2: Compute the height of the rectangle or triple bottom and project it upward. The high is at 36.61 and the low is 34.95 for a height of 1.66. Using a full height means price will hit the target 85% of the time. Thus, let’s multiply the height by 85% to get a closer target: 1.41 + rect top of 36.61 = 38.02, call it 38. The mid December high is at 37.75, so price may stall there, but a 38 target would be fine. I’d probably put it at 37.91, just to avoid a round number resistance. Everyone else is going to sell at 38 and force price down. You want to exit before that happens.

Answer 3: A stop just below the rectangle low (34.95) would be a good choice, say 34.91. Price closed at 36.67, so that would represent a loss of 4.6%. This is tiny by my standards, so it’s a good spot. Volatility stop: $35.51 3.2%. 2x volatility: $0.97. This is a better location which we’ll see on the next chart.

As you can see, price didn’t even come close to the price target. The flat horizontal consolidation region would also make for a good stop loss location, which would cut the potential loss nearly in half. That would have been a good play because price threw back and continued down. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): triangle, wedge, broadening top, triple bottom, big W

The falling wedge has broken out downward. Question 1: Do you buy or sell short? Question 2: What is your target price? Question 3: What is your stop loss? The answers appear below and a chart appears on the next page.

Answer 1: Sell short, if you dare, because of the downward breakout. Answer 2: I would expect price to decline to the flag at A, a knot of support that might cause a pullback. After that, I would expect a continued decline because that’s what happens after a pullback, usually (like 87% of the time). Answer 3: If price closes above the top trendline, then I would close out my position.

Price made a lower low the next day but then gapped up to close above the top trendline. That would be the exit signal. A downward breakout followed by a quick reverse is common behavior for falling wedges, since it happens 27% of the time. That may not sound like much until it happens to a stock you have shorted. The end.

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): diamond, 2 triangles, 2 broadening tops, inverted and ascending scallop, and a shark-32 (a 3 day symmetrical triangle or pennant, each day’s trading range is inside the prior day).

It’s well after the downward breakout from the symmetrical triangle. Price pulled back into the formation and eventually move higher, busting the downward breakout. A busted chart pattern suggests a strong move. 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?

The answers appear below and a chart on the next page.

Answer 1: Buy, but recognize that you’re late to the party. That increases the risk of a failed trade. Answer 2: I’d use the height of the triangle projected upward from the top of the chart pattern. Alternatively, you can draw a line from the top of the triangle upward and parallel to the lower trendline. When it reaches the DAY of the breakout (and I’d use the lower breakout as a guide), then the position (price) of the line directly above the breakout becomes the target price. I show this in the below chart. The green line is the one parallel to the bottom of the triangle. From the downward breakout, the price of the green line directly above becomes the target. Price reaches the target soon after buying. Answer 3: I’d place it at point A. A check of volatility says to place a stop no closer than 40.51, or 4.6% lower than the current close. I show the price as the green line. Choose which one you prefer.

This is what happened to the stock after buying. If you owned the stock, selling when price pierced the upsloping red trendline would work well. It would have saved you from a world of pain. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): I only show one pattern today, but it’s so obvious, I’m going to make you guess.

The triangle has broken out upward. 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?

The answers appear on the next page, buried in my notebook entries.

Date: 6/30/05 Trade time: placed after the close today Filled at: limit order at 11.71. Filled on 7/1/05 (the last bar shown) Stop: 10.63. Place this once the order fills Upside target: 13.45 using 100% measure rule or 12.58 using 50% of height. Future Nasdaq direction (guess): Down. It's at the bottom of a broadening pattern with a partial rise. Buy reason: ascending triangle with potential upward breakout. This is high risk as market is unsettled and I predict will go down in the short term. Earnings are due 7/25. In Q3, drug trial results from lupus trial of lymphoStat-B drug in phase II. If this shows promise, the stock will pop. Otherwise, it might DCB. In short, I think this will result in a losing trade. Why invest? It's a buy signal. Period. Use a stop to minimize the loss. If the general market pulls the stock down tomorrow and in the future, the stop order to buy won't be hit.

More on next page.

Here is my notebook entry for the sale. 7/5/05 Stop placed at 10.91, just below the 63% Fibonacci retrace since the stock has broken out to new highs. Potential loss: 7%. 7/8/05 Stop raised to 12.13. That's just below the intersection of a long term down trendline on the weekly chart and just above the 50% Fib retrace line. I'm tempted to sell and cash in my nearly 2 grand winnings after just a few days in the trade. The high volume suggests a dearth of new buyers waiting in the wings, but with the positive news of a broker init with a buy and promising news on the drug trial front (Glaxo taking an option), this might be a longer term play. Date: 7/11/05 Trade time: market open Filled at: 13.72 Sell reason: This is up on a broker init coverage with a buy. Very heavy volume but it's less than yesterday even though price closed higher. My guess is the stock will open lower and head back down. I can always buy back in...as if that’ll happen! Momentum is slowing. RSI is overbought. ROC (rate of change) is overbought. The indicators are saying it's time to bail out. I bought at 11.71 and sold at 13.72 for an 11-day gain of 17%. How did I do? The next page shows what happened.

Looks like I sold about two weeks too early but I was lucky to stand aside while the stock dropped in half when one of its drugs in development failed trials. The end

Bulkowski’s Trading Quiz Here’s the latest quiz. What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): channel, busted head-and-shoulders, 3 falling peaks, broadening bottom, wedge.

Price has broken out of the channel upward, on high volume.

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?

The answers appear below and a chart on the next page.

Answer 1: Buy. Why? Because I know what’s coming. Answer 2: You can measure the channel height and project it upward from the top of the channel. The height, measured vertically, is $1.71. Added to the breakout price of 17.60 gives a target of 19.31. The price closed at 19.75, so that’s no real help. Answer 3: Place a stop below the channel low, at A, 16.15. The close is at 19.75, a cool 18% drop. That’s much too far. 2x volatility is $1.20, so a volatility stop at 16.80 is closer but still 15% away. The 3 red lines show a Fibonacci retrace of the move from A to the recent high. Placing a stop below the lowest of the 3 red lines (a 62% retrace), means a stop at 17.60. That still 11% but it’s close enough with volatility being what it is.

I became interested in the stock a few bars before the last one shown on the above chart. Why? The answer is on the next page.

This is a high and tight flag. That’s when price doubles (at least 90%) in 2 months or less. The launch point is at the base of the flagpole, at 16.15, and price peaked at 31.90, the day before the last bar. That’s a climb of 98% in just over a month. I show the chart (and all charts) on the logarithmic scale. Notice how the price climb tends to flatten the channel and the price rise since August. What was a hilly, rounded landscape in the first chart (page 1) is now a more sedate rise. Here’s my notebook entry for the trade when I bought on the last bar shown. Date placed: 2/13/06 Order type: market open tomorrow Date Bought: 2/14/06 Bought at: 31.03 Stop, % loss: 27.81 or 10% down Volatility, stop: 27.10, 13.1%. Upside target: 30.21 high on 2/10 - 16.15 trend low on 12/28/05 = 14.06 height x 50% = 7.03. 30.21+7.03 = 37.24. Future market direction: Down? Indicators: RSI: oversold. CCI: buy signal today, MACD: very high momentum. Bollinger: midway between middle and upper band Associated commodities: None Score and price target: +2, 39.18 using generic score Industry and stock rank: 18/46 and 1/10 SAR: None above except round number at 35. Congestion from 30 to 28. Buy reason: HTF with upward breakout Buy again plans: None. No bullets left.

The top chart is the RSI which says the stock is overbought and ripe to fall. CCI comes next and it shows a buy signal followed by a sell signal on the last 2 bars of the price chart (I only saw the buy on 2/13), from the CCI and DCCI lines crossing. Next comes MACD which is bullish, high momentum on the histogram chart. Bollinger bands show price riding up in the middle of the top two bands. Notice how the bands changed from a narrow width to a much wider one as price took off.

Dissecting my notebook entry, I placed a stop at 27.81, 10.3% below the buy price of 31.03. The volatility stop was too far away at 13.1% from the current close. I used the measure rule for HTFs, half the height of the flagpole to project a price target. That was 37.24. I scored the chart pattern using my scoring system for chart patterns. For more information, consult my book Trading Classic Chart Patterns for the logic, but you won’t find this pattern in the book. That’s why it says I used a generic score – the same scoring method as for classic patterns but I used average numbers to extrapolate the result for patterns I haven’t applied the scoring method to. Clear as mud, right? It’s not important. Scores above 0 have a better probability of hitting their price targets than those with scores below 0. Industry and stock rank. The industry, building materials, ranked 18 out of 46 for performance over the last 6 months. Inside the industry, this stock ranks first out of ten stocks for performance over the same 6 months. All that means is I like to see a strong industry movement and strong stock performance. Will the results prevent me from taking a trade? No.

Here’s the chart.

More on the next pageAs each day ticked higher, I looked at the stock and ran a volatility check. When the volatility stop moved up, I raised my stop. You can read the comments yourself. At one point, 2x volatility was over $3. That placed the stop much too far away, so I chose to narrow the spread. Why use a volatility stop? Because it offered the only way to set a stop except for guessing. Usually, I like to hide beneath a minor low but with a straight line run, there’s no minor low!

Nevertheless, the stop was often 10% or more below the current close. That’s a huge give back but one that’s necessary in order to stay in the trade.

“2/15/06 Stop raised to 28.68, current vol stop setting. 2/19/06 Stop raised to 29.07, an odd number (7 cents) above the volatility stop of 29. The market has been up but the stock really hasn't followed. With intraday price range narrowing, I'm thinking the stock will tumble, taking me out for a loss. Why not tighten the stop more? Because I want to give it every opportunity to climb, but my guess is it won't. 2/22/06 Stop raised to 30.33. Vol stop is 30.25 and I want to avoid round number, rounded up. Vol stop is also 10.7% down, which is large. 2/23/06 Stop raised to 31.07, breakeven and vol stop is 30.98. 2/24/06 Stop raised to the vol stop of 32.22. 2/27/06 Stop raised to 32.68, the vol stop setting. 2/28/06 Stop raised to 33.68, 20 cents above the vol stop setting of 33.48. 3/1/06 Stop raised to 35.07, above the vol stop of 34.76 because it's almost 12% down. 3/2/06 Stop raised to 36.03 3/3/06 Stop raised to 37.03. This is well above the vol stop of 35.17, -15%. Today is an outside day with a $3.50+ high-low range. I think the end is near but still want to give price a chance to run. Thus, since price closed up a buck, I'm raising my stop a buck. 3/6/06 Stop raised to 38.21. This is well above the 37.76 vol stop setting but the wide ranging day 2 days ago caused CCI to issue a sell. With today's small range, it suggests a topping out of the stock. So, I tightened the stop. 3/7/06 The stock closed lower and I figure everyone else will sell at tomorrow’s open. In the past, the stock has tumbled on the open then recovered throughout the day. Except for today. It closed lower. With CCI signaling a sell 3 days ago, I think it's time to cut the giveback to 0 and exit. Date placed: 3/7/06 Date sold: 3/8/06 Sold: market open order Sold at: 39.89 Sell reason: I think this is finally topped out and everyone is going to head for the exits and quickly!” They did exit at once. The open at 39.89 was well below the prior close of 41.12. Price on the day I sold dropped to a low of 38.53, so I think I did well. The target was 37.24 but the scoring system had a target of 39.18 (based on the median rise of HTFs). I beat both targets. Since the trade, the stock has hit overhead resistance except for today. When I checked last, price was moving up again. The end

Bulkowski’s Trading Quiz What chart patterns can you find? A hint appears below and answers on the next page.

Hint. Look for the following chart patterns (If you find others, great!): 2 head-and-shoulders, wedge, three rising valleys, and a dead-cat bounce.

The rising wedge has an upward breakout, confirmed when price closes above the top trendline. 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?

The answers appear below and a chart on the next page.

Answer 1: I don’t like wedges and the upward breakout is unusual. It’s a buy signal though. Answer 2: Take the height of the wedge, multiply it by 58% (because that’s how often this measure rule works) and add it to the breakout price. The top of the wedge is at 10.43, low at 9.62 for a height of 81 cents. Multiply by 58% to get 47 cents and add it to the breakout price of 10.43 to get 10.90. Answer 3: With low priced issues, they are more volatile and it’s more difficult to place a stop. I would probably use a volatility stop on this one. That places it at 9.75 or 6.8% below the current close. A vol stop is computed by finding the daily high-low range over the last month and averaging the values, multiplying by 2 and subtracting the result from the current low. It’s a way to prevent from being stopped out my normal price action.

The stock plummeted in a dead-cat bounce on a lower sales outlook. If you trade stocks long enough, you will probably run across a dead cat bounce. Even if you placed a stop below the bottom of the chart pattern, you would have lost more than that as price opened lower. On 7/28, the stock closed at 11.10 and it opened the following day at 9.25 before closing at 7.95, a close-to-close decline of 28%. The end.