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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 02/24/2017
20,822 11.44 0.1%
9,422 86.07 0.9%
699 10.33 1.5%
5,845 9.80 0.2%
2,367 3.53 0.1%
YTD
5.4%
4.2%
6.0%
8.6%
5.7%
Tom's Targets    Overview: 02/14/2017
21,150 or 20,000 by 03/15/2017
8,800 or 9,700 by 03/01/2017
700 or 640 by 03/01/2017
5,950 or 5,650 by 03/01/2017
2,400 or 2,260 by 03/01/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

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Thursday, 5/29/2008. Nasdaq: is down too easy?

The Nasdaq Composite on the daily chart

This is a chart of the Nasdaq Composite on the daily scale. The most recent price action reminds me of a head-and-shoulders top chart pattern. If the composite closes below the green neckline, then it will confirm the head-and-shoulders top as a reversal pattern and I expect the market to decline. I offer no guarantees that the neckline will be pierced, because I am bullish, but I understand that retraces of the uptrend occur in a bull market. Having said that, I expect a retrace to take price lower. It has been trending upward for too long without a good retrace, so I think we are overdue.

If the composite retraces 38% of the rise from the March low, that would place it at 2,400. A 50% retrace would be 2,350 and a full 62% decline would see the composite hit 2,300.

Let’s say that the composite does not listen to me. The game plan would include more sideways action to lengthen the pause before a renewed push to a summit near the price level of the May peak. If the climbers are well rested, they could push past camp 2 and go on to 2,700, the site of other peaks at the same altitude. That kind of a move could take as little as a month but more likely would take 2 months.

The Nasdaq Composite on the weekly chart

However, if a storm front moves in, the climbers may give up and decide to quit the climb altogether. If that happens, then how far will the composite drop? I show the second chart, highlighting my guess as to what will happen. To the left of the vertical red line is the composite on the weekly scale. To the right of it are two paths and two guesses. I think the composite will decline to the green support line, about 2,375. It may go a bit higher to start but if the head-and-shoulders top we see on the daily chart confirms, then the composite will tunnel its way into the green zone.

If you believe in mirrors, where the chart is a reflection about some imaginary line, then the price action on the right will mirror what you see on the left. I show that by stealing the left and reflecting it horizontally. That would be path B. The market declines before resuming the rise to a new left shoulder of a complex head-and-shoulders top.

That could certainly happen but I don’t think so. Why? Because it is too easy. People like me see the trend and make this type of prediction and the market will try to fool us. Thus, I think the market will drop to the green line and take path A, moving higher, probably pausing at the peaks of the head-and-shoulders top at about 2,375.

If you own a tech stock, do nothing. Wait for the composite to close below the neckline of the head-and-shoulders top (see the daily chart, on top). If that occurs, then consider protective puts on your position. If I am wrong, it is comparatively cheap insurance. If I am right, you could sell your stock position and hold onto the put and see what develops. You could also trade an ETF that shorts the Nasdaq 100 (such as PSQ and QID).

-- Thomas Bulkowski

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Wednesday, 5/28/2008. Electric Utilities Powering Up?

Dow Utility average (^DJU) on the daily chart

The last time I talked about the Dow utility average, I made the case that it was going to rise. The picture is a rather large one to include here, so I show just a green line on the updated chart to show what has happened since the May 5 post. To my embarrassment, the average dropped the next day and continued lower for about a week. The decline was a retrace (E) to the corrective phase (D -- circled) of a measured move up chart pattern that began in April (the move from B to C).

Wrong guesses happen from time to time and it is to be expected. But what happens now? A poorly formed diamond top I show outlined in red. Price has completed a throwback at A to the upper right trendline of the diamond, and I expect the average to continue its climb as the green line shows.

Overhead resistance may get in the way of the average moving much higher, though. I show that resistance by the magenta line highlighting the flat bottom in December. I do not think it will be easy to pierce this resistance, having tried and failed to do it once already (just a few days ago).

Having just finished running through the utility stocks that make up the Dow utility average, I am not convinced that the average will move higher in the coming days. Many of the stocks are heading lower, not all, but many. The immediate move may be lower in the next few days followed by a resumption of the uptrend. For now, though, I think I will stick to my bullish prediction, knowing that the average could drop all the way to E before buying demand takes over.

-- Thomas Bulkowski

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Tuesday, 5/27/2008. RSI test is here!

A chart of the Jo-Ann Stores (JAS) on the daily scale

Monday was a US holiday so that means I don’t have to post anything either. Yippee! The following is taken from the RSI test I finished this past weekend. I will be building a model portfolio around the results and should have it up and running soon.

The figure shows a bar chart of Jo-Ann Stores (JAS) on the daily scale and the RSI indicator beneath that. The red bar is the overbought area at 80 and above. The green bar is the oversold area at 20 and below. The red RSI line is the sell signal using a 14 day look back and the blue line, which looks black on the chart, is the RSI buy signal line using a 16 day look back.

The top chart shows where the RSI moves into the overbought or oversold areas by using vertical bars of red or green. These are not the buy and sell signals. A buy occurs when the buy RSI line moves below 20 and then above it. The entry happened on January 8 at the opening price of $10.10, as shown in the chart.

The RSI sell line moved to 80 or above then dropped below it. The sale occurred at the opening bell on the next trading day, February 19, at 16.14 for a gain of 59.8% in about 1.5 months.

If you look at the complete chart of JAS, you will see that this was a well-timed trade. The entry signal came within a week of the low and the exit occurred just two days after price peaked. When the stock finished declining in March, it went on to new highs and peaked at 22.30 in May 2008 (the highest price as I write this), above the sell price of 16.14.

Notice in the chart how the RSI lines begin moving up before price when it leaves congestion. I show this at A and you can see how far the RSI lines have moved before price actually breaks out of congestion (the day after the left magenta line).

A similar prediction occurred at B. The RSI lines were dropping for about two weeks before price followed (at the right magenta line).

-- Thomas Bulkowski

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Thursday, 5/22/2008. S&P set for rebound.

A chart of the S and P 500 index (^GSPC) on the daily scale

This is a chart of the S&P 500 index from my blog posting of about a week ago. There I talked about the importance of the shooting star candlestick, overhead resistance, and checking the dates of upcoming economic reports that are important to traders and investors. Given that yesterday the market dropped on lousy inflation numbers, the posting seemed to be timely and prophetic.

The day after I posted the note, I was upset that the S&P had the audacity of breaking out above the top of the shooting star, something that is not supposed to happen when there is overhead resistance. I certainly felt embarrassed by the mistake, but I know that I can’t be right all of the time.

Now that I look at the updated chart of the S&P (Figure B, the lower of the two charts), I do not feel so bad. I point to the shooting star that ended the top chart but is now buried in mud somewhere. I also show a rising wedge, bounded by two red trendlines. Rising wedges breakout downward most often (69% of the time, as a matter of fact) and that is what I see happening here.

A chart of the S and P 500 index (^GSPC) on the daily scale

The question that is on everyone’s mind is how far will price drop? I am still sticking to the top green line as a reversal point. That means another down day -- maybe -- but we should find support here. And I am posting this on Wednesday evening of May 21, by the way. Of course I could be wrong and if so, then the lower green line should lend support to the index.

Having said that, the chart pattern indicator has signaled a tentative sell as of May 19 (which is not reflected in the charts on the linked page, but appears on the home page, center, near the bottom). That signal may or may not become valid, depending on what happens in the next several days. My gut feeling is of hope and bullish sentiment. I see lots of buying opportunities presenting themselves, but if the uptrend that began in March is over, any long plays will be losing trades. That is a possibility that weighs on my mind.

The good news is that I unloaded two holdings yesterday morning (one of which I wrote about), before this recent downturn began and I may unload another big winner (30+% gain) tomorrow morning. So I will be waddling like a duck to the bank, weighed down on one side by my wallet. Maybe I won’t have to exercise that day.

-- Thomas Bulkowski


Wednesday, 5/21/2008. ITB: Earthquake in housing fund!

The DJ US home construction index fund

Both pictures are of the Dow Jones US home construction index fund (ITB) that I discussed back in February. I made the bold prediction that the exchange traded fund would form a head-and-shoulders bottom, which it did. Following that, I suggested that price would rise in the manner shown by the top chart. The bottom chart shows how well my prediction turned out.

Looking at the lower chart, I see weakness. Price has completed a small head-and-shoulders top chart pattern. This one is unusual because it has a dual right shoulder, the congested peak to the right of RS at D. Price closed below the neckline and then pulled back to A. My research on pullbacks indicates that price tumbles 87% of the time. The other 13% happens when price closes above the top of the chart pattern, which can be a long way from the breakout.

Anyway, price has dropped and I see it continuing to drop. The green support line I show extends to the right of the March valley. This is where I see support coming from and where price should pause if not reverse. If you draw a trendline connecting the two shoulder lows, B and C, and extending the line to the right, price might pause or reverse there, so that is also worth watching. If you look at the individual stocks in the homebuilding industry, many are showing weakness that is similar to the chart. Here is a list of housing stocks that I follow.

-- Thomas Bulkowski

The DJ US home construction index fund (ITB)
Symbol Chart Pattern Start End
BZHTriple top03/24/200804/16/2008
BHSTriangle, symmetrical04/10/200805/05/2008
CTXPipe bottom04/21/200804/28/2008
DHIPipe top02/19/200802/25/2008
HOVTriangle, symmetrical03/24/200804/28/2008
KBHTriple bottom04/15/200805/01/2008
LENPipe bottom04/14/200804/21/2008
MHOTriangle, descending03/31/200805/19/2008
MDCTriangle, symmetrical04/02/200805/05/2008
PHMRoof, inverted02/01/200804/07/2008
RYLHead-and-shoulders bottom09/27/200701/09/2008
SPFDead-cat bounce05/12/200805/13/2008
TOLPipe bottom04/14/200804/21/2008
WCIDead-cat bounce05/07/200805/12/2008
ITBHead-and-shoulders top03/24/200804/18/2008

 

Definitions
RS is relative strength (where 1 is best). For others, see the glossary.
’Breakout is upward/downward 100% of the time’ means price breaks out up/down by definition, not by statistically measuring the rate.
All numbers assume a bull market and are based on the breakout direction that occurs most often.
For more information, consult my book, Encyclopedia of Chart Patterns, Second Edition.
 
Beazer Homes USA, Inc (BZH)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 417 out of 552
Latest close as of 05/20/2008: $8.15
1 Month average volatility: $0.81. Volatility based stop: $6.08 or 25.3% below the close.
Change year to date: 9.69%
Volume: 1,763,300 shares
3 month average volume: 2,178,803 shares
 
Chart pattern: Triple top reversal pattern from 03/24/2008 to 04/16/2008
Performance rank: 7 out of 21.
Breakout is downward 100% of the time.
Average decline: 19%.
Break-even failure rate: 10%.
Pullbacks occur 61% of the time.
Price meets the measure rule target 40% of the time.
Top
Brookfield Homes Corp (BHS)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 378 out of 552
Latest close as of 05/20/2008: $14.95
1 Month average volatility: $0.85. Volatility based stop: $13.24 or 11.4% below the close.
Change year to date: -5.38%
Volume: 94,700 shares
3 month average volume: 218,991 shares
 
Chart pattern: Triangle, symmetrical continuation pattern from 04/10/2008 to 05/05/2008
Performance rank: 16 out of 23.
Breakout is upward 54% of the time.
Average rise: 31%.
Break-even failure rate: 9%.
Throwbacks occur 37% of the time.
Price meets the measure rule target 66% of the time.
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Centex Corp. (CTX)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 205 out of 552
Latest close as of 05/20/2008: $21.81
1 Month average volatility: $1.40. Volatility based stop: $18.80 or 13.8% below the close.
Change year to date: -13.66%
Volume: 5,333,800 shares
3 month average volume: 4,641,389 shares
 
Chart pattern: Pipe bottom reversal pattern from 04/21/2008 to 04/28/2008
Performance rank: 2 out of 23.
Breakout is upward 100% of the time.
Average rise: 45%.
Break-even failure rate: 5%.
Throwbacks occur 44% of the time.
Price meets the measure rule target 83% of the time.
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Horton, D.R. Inc. (DHI)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 76 out of 552
Latest close as of 05/20/2008: $14.32
1 Month average volatility: $0.89. Volatility based stop: $12.36 or 13.7% below the close.
Change year to date: 8.73%
Volume: 8,971,500 shares
3 month average volume: 8,459,806 shares
 
Chart pattern: Pipe top reversal pattern from 02/19/2008 to 02/25/2008
Performance rank: 4 out of 21.
Breakout is downward 100% of the time.
Average decline: 20%.
Break-even failure rate: 11%.
Pullbacks occur 41% of the time.
Price meets the measure rule target 70% of the time.
Top
Hovnanian Enterprises Inc (HOV)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 216 out of 552
Latest close as of 05/20/2008: $8.88
1 Month average volatility: $0.72. Volatility based stop: $7.32 or 17.6% below the close.
Change year to date: 23.85%
Volume: 6,178,900 shares
3 month average volume: 3,537,289 shares
 
Chart pattern: Triangle, symmetrical continuation pattern from 03/24/2008 to 04/28/2008
Performance rank: 16 out of 23.
Breakout is upward 54% of the time.
Average rise: 31%.
Break-even failure rate: 9%.
Throwbacks occur 37% of the time.
Price meets the measure rule target 66% of the time.
Top
KB Home Corp. (KBH)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 285 out of 552
Latest close as of 05/20/2008: $23.15
1 Month average volatility: $1.34. Volatility based stop: $20.28 or 12.4% below the close.
Change year to date: 7.18%
Volume: 5,942,700 shares
3 month average volume: 4,541,660 shares
 
Chart pattern: Triple bottom reversal pattern from 04/15/2008 to 05/01/2008
Performance rank: 7 out of 23.
Breakout is upward 100% of the time.
Average rise: 37%.
Break-even failure rate: 4%.
Throwbacks occur 64% of the time.
Price meets the measure rule target 64% of the time.
Top
Lennar Corp. Cl A (LEN)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 194 out of 552
Latest close as of 05/20/2008: $18.83
1 Month average volatility: $1.16. Volatility based stop: $16.17 or 14.2% below the close.
Change year to date: 5.25%
Volume: 4,257,800 shares
3 month average volume: 6,668,366 shares
 
Chart pattern: Pipe bottom reversal pattern from 04/14/2008 to 04/21/2008
Performance rank: 2 out of 23.
Breakout is upward 100% of the time.
Average rise: 45%.
Break-even failure rate: 5%.
Throwbacks occur 44% of the time.
Price meets the measure rule target 83% of the time.
Top
M/I Homes, Inc. (MHO)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 124 out of 552
Latest close as of 05/20/2008: $15.62
1 Month average volatility: $1.00. Volatility based stop: $13.46 or 13.8% below the close.
Change year to date: 48.76%
Volume: 209,100 shares
3 month average volume: 401,691 shares
 
Chart pattern: Triangle, descending reversal pattern from 03/31/2008 to 05/19/2008
Performance rank: 10 out of 21.
Breakout is downward 64% of the time.
Average decline: 16%.
Break-even failure rate: 16%.
Pullbacks occur 54% of the time.
Price meets the measure rule target 54% of the time.
Top
MDC Holdings Inc. (MDC)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 102 out of 552
Latest close as of 05/20/2008: $42.93
1 Month average volatility: $1.87. Volatility based stop: $38.77 or 9.7% below the close.
Change year to date: 15.62%
Volume: 551,200 shares
3 month average volume: 937,260 shares
 
Chart pattern: Triangle, symmetrical continuation pattern from 04/02/2008 to 05/05/2008
Performance rank: 16 out of 23.
Breakout is upward 54% of the time.
Average rise: 31%.
Break-even failure rate: 9%.
Throwbacks occur 37% of the time.
Price meets the measure rule target 66% of the time.
Top
Pulte Homes Inc. (PHM)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 130 out of 552
Latest close as of 05/20/2008: $13.62
1 Month average volatility: $0.83. Volatility based stop: $11.83 or 13.2% below the close.
Change year to date: 29.22%
Volume: 5,359,500 shares
3 month average volume: 7,497,622 shares
 
Chart pattern: Roof, inverted reversal pattern from 02/01/2008 to 04/07/2008
Performance rank: 13 out of 21.
Breakout is downward 50% of the time.
Average decline: 17%.
Break-even failure rate: 10%.
Pullbacks occur 56% of the time.
Price meets the measure rule target 73% of the time.
Top
Ryland Group, Inc (RYL)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 65 out of 552
Latest close as of 05/20/2008: $31.81
1 Month average volatility: $1.69. Volatility based stop: $28.04 or 11.9% below the close.
Change year to date: 15.46%
Volume: 1,772,200 shares
3 month average volume: 2,188,329 shares
 
Chart pattern: Head-and-shoulders bottom reversal pattern from 09/27/2007 to 01/09/2008
Performance rank: 7 out of 23.
Breakout is upward 100% of the time.
Average rise: 38%.
Break-even failure rate: 3%.
Throwbacks occur 45% of the time.
Price meets the measure rule target 74% of the time.
Top
Standard Pacific (SPF)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 432 out of 552
Latest close as of 05/20/2008: $2.52
1 Month average volatility: $0.49. Volatility based stop: $1.44 or 42.9% below the close.
Change year to date: -24.78%
Volume: 4,906,900 shares
3 month average volume: 5,228,092 shares
 
Chart pattern: Dead-cat bounce from 05/12/2008 to 05/13/2008
Top
Toll Brothers (TOL)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 132 out of 552
Latest close as of 05/20/2008: $23.15
1 Month average volatility: $1.19. Volatility based stop: $20.51 or 11.4% below the close.
Change year to date: 15.40%
Volume: 4,765,100 shares
3 month average volume: 4,436,355 shares
 
Chart pattern: Pipe bottom reversal pattern from 04/14/2008 to 04/21/2008
Performance rank: 2 out of 23.
Breakout is upward 100% of the time.
Average rise: 45%.
Break-even failure rate: 5%.
Throwbacks occur 44% of the time.
Price meets the measure rule target 83% of the time.
Top
WCI Communities Inc. (WCI)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Stock RS rank: 547 out of 552
Latest close as of 05/20/2008: $1.90
1 Month average volatility: $0.37. Volatility based stop: $1.07 or 43.8% below the close.
Change year to date: -49.74%
Volume: 468,700 shares
3 month average volume: 1,657,143 shares
 
Chart pattern: Dead-cat bounce from 05/07/2008 to 05/12/2008
Top
DJ US Home construction index fund (ITB)
Industry: Homebuilding
Industry RS rank: 11 out of 45
Latest close as of 05/20/2008: $18.27
1 Month average volatility: $0.83. Volatility based stop: $16.47 or 9.9% below the close.
Change year to date: 3.63%
Volume: 750,900 shares
3 month average volume: 503,051 shares
 
Chart pattern: Head-and-shoulders top reversal pattern from 03/24/2008 to 04/18/2008
Performance rank: 1 out of 21.
Breakout is downward 100% of the time.
Average decline: 22%.
Break-even failure rate: 4%.
Pullbacks occur 50% of the time.
Price meets the measure rule target 55% of the time.
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Tuesday, 5/20/2008. EWA: Exit time for down under.

The MSCI Australia Index fund (EWA) on the daily chart

I am writing this on late Monday evening, and I have an order to sell this at tomorrow’s opening. I last reported on this exchange traded fund back on April 22, which I wrote and posted the day before (4/21). The lower chart is from that blog entry and you can compare the two to see how price progressed.

After thinking about it, I decided to buy the fund. I placed a buy stop at 28.45 which filled on April 23 at a price of 28.42. I placed the buy order at 28.45 because I wanted to be sure that price cleared the highest high in the head-and-shoulders bottom chart pattern. In this case, that was the left armpit high at 28.34.

The MSCI Autralian Index fund (EWA) on the daily chart

I placed a stop loss order at 26.07, below the right shoulder low (RS) and below the volatility stop of 27.04. I did not use the volatility stop because the fund gapped a lot and I felt it was more volatile than the number suggested (which does not make a lot of sense unless you believe that volatility has increased more in the last few days since a vol stop uses 22 trading days of data).

The upside target was 29 (the site of a knot of congestion in December 2007 -- circled), with round number resistance at 30, and near the site of the old high in July 2007. I marked the high as point A (top chart), which peaks at 30.40. The recent high (today, Monday), is at 30.54. The mirror between these two is unmistakable, and mirrors are something I have focused on in these blog postings. My guess is that price will begin to correct (move lower) because of that overhead resistance. I could be wrong but the little profit I have in this trade (just over 6%), I want to keep. I also looked at 32 as being another source of resistance, so that is yet to come.

In my notebook, I wrote, "Buy reason: head-and-shoulders bottom with an upward breakout that pierced a down sloping trendline from the Oct 31 peak (arith scale). Price confirmed HSB with close above neckline. The only problem I see is that once price gaps upward, it almost always retraces the gain, dropping." The last sentence was an interesting one and it rang true for this buy. The ETF dropped for several days after I bought but then recovered and moved up in a near straight-line run over the last week or two.

As price climbed, I moved the stop up. Here is my notebook entry for the stop placement.

  • 4/24/08 Stop placed at 26.97, below the 62% fib retrace, below the minor low at 4/18/08 and below the vol stop of 27.42.
  • 5/7/08 Stop raised to 27.33, slightly below the vol stop setting.
  • 5/12/08 Stop raised to 27.97, slightly below the vol stop setting.
  • 5/14/08 Stop raised to 28.63, vol stop.
  • 5/17/08 Stop raised to vol stop, 29.33.
  • 5/19/08 I decided to sell this stock because it's at the level of the July '07 peak and it looks to be pausing at 30. Round number with mirrors. Time to exit.

I hope price gaps open higher...

-- Thomas Bulkowski


Monday, 5/19/2008. PXE review. Oil up but for how long?

The PowerShares dynamic Energy ETF (PXE) on the daily chart

The top chart shows the PowerShares dynamic energy (PXE) exchange traded fund on the daily scale as posted on the April 17 blog entry. It shows my guess as to how the ETF would do over the coming days and weeks.

The second chart, Figure B, shows how price moved since the last post.

The following comments refer to the latest chart, Figure B.

To review, the chart shows a head-and-shoulders bottom chart pattern. The neckline joins the armpits of the left shoulder (LS) and right shoulder (RS). Since the neckline slopes downward, a buy signals when price closes above it. If the neckline were to slope upward, I would use a close above the right armpit as the buy price. That would mean a close above point C. Point A is where the top chart ends. Point B shows the throwback to the neckline and then price climbing thereafter.

An updated chart of the PXE on the daily scale

In my prior post, I suggested waiting for the throwback before buying the ETF. Many other energy related securities show a profile similar to this one. Now I fear that price is getting a bit frothy, for lack of a better word. Analysts are talking about $200 per barrel oil and each day the price seems to rise. Since I am lucky to trade from home, I rarely venture outside. Last year, for example, I added about 500 miles to my car’s odometer. That is less than two tank full's worth of gas. From what the reports say, the price at the pump is rising daily and yet I see people running their air conditioned, gas guzzling vehicles when rolling down the window would suffice. When I go driving, I see them shooting ahead of me when the light turns green, pushing that pedal to the floor. I see them speeding down the road, exceeding the speed limit, knowing full well that they can almost watch the gas gauge moving toward empty. I still do not think that many Americans have gotten the message (or they are filthy rich), but I digress.

The price of oil might continue to rise and I am sure that will be true. But I am also sure that we are closer to the top than the bottom. Buying any energy related company now may mean limited move up but you never know. Price could continue to run, but with everyone jumping in and buying, soon we will run out of buyers. When that happens, the ETF will decline. Nothing in the chart says that scenario will play out, but it will be worth your time to monitor the charts in the coming weeks.

-- Thomas Bulkowski

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Thursday, 5/15/2008. S&P Going Down! But not far.

A chart of the S and P 500 index (^GSPC) on the daily scale

I show a chart of the S&P 500 index (^GSPC) on the daily scale because of the shooting star candlestick. A shooting star can be either one or two candle lines, so I am referring to the single line version as shown in the inset. The candle body can be any color and it sports a tall upper wick (upper shadow) and the body is a small one clustered near or at the bottom of the candle line. It acts as a bearish reversal 59% of the time, so it is not an outstanding performer. When price closes below the bottom of the candle, it typically does not drop far over the next 10 days, just 3.57%, which ranks 60 out of 103 candle types, where 1 is best.

Let us assume that price has formed a second peak and is going down. How far will it drop? If you use the candle height projected downward, price will hit the target 82% of the time. That means measuring the height of the candle and subtracting it from the low price to get a target of: 1405.65 (low) - (1420.19 (high) - 1405.65 (low)) or 1391.11. A closer target would be 1393.73, found by multiplying the candle height by 82% and subtracting the result from the current low. All of this information comes from my book, Encyclopedia of Candlestick Charts, and that is how I use the information. An upward breakout (a close above the candlestick’s high) target would be found using the same method added to the high for a target of 1431.97 with an 81% probability of reaching 1434.73.

Notice that the horizontal red trendline nears valleys A and B and touches peak C. This represents overhead resistance. Below the candle I show support with the two green lines. The top line matches with several peaks over the last 4 months and I drew the lower line along the valleys. I suspect that should price drop it will reach the top line and bounce off it, resuming the uptrend. This is just a guess, of course, and a more educated guess would involve looking at the economic reports due out in the coming days. You can find them at yahoo!finance: http://biz.yahoo.com/c/e.html. A poor showing by a report could send the average tumbling, depending on the importance of the report. Likewise, a good report might push the index through overhead resistance.

-- Thomas Bulkowski

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Wednesday, 5/14/2008. Dell Breakout or Bust?

A chart of Dell Computer (DELL) on the daily scale

I have discussed Dell Computer in past entries (bullish divergence in March and more recently a pullback in the stock, in May) but neither were well-timed predictions. That is the way the probabilities fall, and no one is right all of the time, especially me. Looking at the chart of Dell (DELL), price has closed above the top trendline, busting the descending triangle. Is it now a time to buy the stock? No.

Before I get to the justification, let us examine the chart closer. Price has followed two red trendlines, sometimes moving lower by a lot or by a little, but usually staying between them. Price closed above the top trendline at B. If price were to continue higher, it could climb to the range shown by the two green lines. The top one connects two peaks and the bottom is near two valleys and also encompasses a breakaway gap. A second gap (the lower one near 22) is an exhaustion gap. Both gaps are weak areas of resistance, which my new book Encyclopedia of Candlestick Charts discusses (page 11).

Where the two converging trendlines meet, somewhere to the right of A, expect price to reverse there. It may not be a lasting reversal but it often works as a turning point. For those of you that are big on volume, the upward breakout on Tuesday (yesterday) occurs on high volume, but not unusually so. It falls well short of the three tallest ones on the chart.

A busted chart pattern is one that breaks out in one direction, reverses course, and breaks out in the other direction. The chart of Dell is an example of a busted descending triangle. This is my favorite chart pattern. Why? Because busted descending triangles often lead to large gains and this one might, too. But, what is wrong with this picture that I would not want to buy the stock?

The answer comes from November and February. See how price gaps lower after the November quarterly earnings announcement (Qtr)? The stock tolerated the late February announcement better but price also dropped. The next earnings announcement is scheduled for May 29, two weeks from tomorrow. It may be that the stock is signaling that the quarter will be a robust one and price will shoot up, but there is no way I want a piece of this stock so close to the announcement. Look at the rise leading to the November earnings release. It appeared that the smart money was buying the stock on increasing volume but they were selling to unsuspecting traders and investors not in the know. Why take a chance? Wait for the announcement and then make a trading decision. That is the smart and safe play. And if the stock should double between now and May 29, so what? There will be other opportunities to make or lose money.

-- Thomas Bulkowski

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Tuesday, 5/13/2008. Check Engine Light on IYE!

A chart of iShares Dow Jones US Energy Sector IYE on the daily scale

The chart shows the iShares Dow Jones US Energy (IYE) exchange traded fund. I am not confident that the fund will drop but I see warning signs that I want you to pay attention to. Think of this as your check engine light coming on. It may mean nothing expensive but it sure increases your stress level.

The ETF climbed to A, dropped to C and then formed a second peak at B. Instead of moving higher, it has stalled there along with many other stocks in oilfield services, integrated petroleum, and petroleum producing industries. Symbols to look for are too numerous to list. If it’s in the energy business, then there is a good chance that it has stalled over the last 2-3 days, or perhaps longer.

Returning to the chart, if price fails to continue moving higher, then it usually tumbles. That may sound obvious but it is the basis for the 2B chart pattern. Think of a 2B as the start of a double top. If price does drop, then it would confirm a double top when it closed below C. I would expect the ETF to find support at the junction of the green trendlines, near D.

If the ETF closes above the top of peaks A and B, then I would expect it to show strength in an uphill run to new highs. That could come as soon as tomorrow (I am writing this on Monday night, so I mean Tuesday). If you own energy stocks, this is the time to pay attention and perhaps tighten those stops.

-- Thomas Bulkowski

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Monday, 5/12/2008. Breakout tutorial

Two ascending triangles on the daily scale

Look at the chart of two fictitious ascending triangles on the daily scale, based on a pattern found in Beazer Homes starting in March 2008. The triangle is outlined in blue with a horizontal top trendline and an up-sloping bottom trendline. Both A and B show upward breakouts but there is a difference between the two charts.

Which setup (A or B) represents the best trading opportunity?

The difference, if you did’t find it, is in the five days leading to the breakout. In A, price makes a straight-line run but in B, price runs into a congestion area in the five days before the breakout.

I proved in a study released on Friday that the differences between trading a chart pattern with a straight-line run (A) and a congestion area (B) is not huge. In the straight-line run, on average, the rise after the breakout will be farther but the risk of failure increases, too. Throwbacks will occur more often and that is usually a bad thing. When looking for chart patterns, trade those with a congestion area forming just before the breakout. If a straight-line run appears, then consider waiting for a throwback to occur and complete. Once price starts moving up again, then enter the trade.

And if you read the overlap study before Sunday morning, then you might look it over. I corrected the errors and clarified the language, making the results clearer.

-- Thomas Bulkowski

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Thursday, 5/8/2008. IEV: Europe is Sinking!

iShares S and P Europe 350 Index (IEV) on the daily chart

Nicely formed patterns are like runway models: They have curves in all the right places. As an example, look at the chart of IEV, the iShares S&P Europe 350 Index exchange traded fund. It shows a rising wedge chart pattern. Rising wedges have price bouncing between two rising and converging trendlines, which I show in red. I like to see several bounces off of each trendline, usually at least five (3 on one side and 2 on the other trendline). If it has less than 5 touches, then consider looking elsewhere. The breakout from the pattern is downward 69% of the time, as in this case.

How far will price drop? The measure rule says that there is a 46% chance that price will reach the bottom of the pattern. If it does, it will equal the support zone formed by prior peaks A and B. It could also stall near the higher peak between A and B, at C, so we will have to wait and see how it plays out.

Along the bottom of the chart, I drew a blue trendline connecting the two valleys. Extended into the future, the ETF may find support there. Should the fund turn around, it should run into overhead resistance shown circled.

-- Thomas Bulkowski

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Wednesday, 5/7/2008. GLD: Gold is Tarnished

streetTRACKS Gold Shares (GLD) on the daily chart

On of my best predictions is the one I made in GLD, the streetTRACKS Gold Shares ETF (exchange traded fund) occurred at E, the day price peaked. I said that I expected gold to drop because I heard on the news that people were selling their gold jewelry to be melted down. The precious metal has been mostly down ever since, as the chart shows (daily scale).

Notice that the symmetrical triangle highlighted by the blue trendlines show support at A, the apex of the triangle. I expect the same thing to happen when GLD drops to the lower symmetrical triangle, shown within the red lines.

Why do I see price moving lower? Because a quick decline often follows a quick rise. The quick rise begins at C and tops out at D. Notice that there is no significant congestion areas such as minor highs or lows along the path. Thus, there is nothing to support the fund now. I expect it to drop to the price at B and maybe to C.

If you step back across the room or take off your reading glasses, you can see a head-and-shoulders top with the shoulders at LS and RS and a head between. Since the neckline, connecting the armpits (shown as a line drawn in magenta), slopes downward, a sell signal is given when price closes below the right armpit, F, and not the neckline. Why? Imagine that the neckline showed a steeper slope. A close below the neckline might never occur, so use the armpit as the early exit for a long holding or the sell short signal.

-- Thomas Bulkowski

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Tuesday, 5/6/2008. ^DJT: Transports in Trouble

Dow Transport average (^DJT) on the weekly chart

I corrected the language in a study on price trends leading to the breakout of chart patterns. I thought I was studying the price trend leading to the breakout, but I was actually studying the number of consecutively higher or lower closes. I plan to test the theory that a congestion zone just below the breakout is a hint of better post-breakout performance than if price is trending leading to the breakout. You might take a few minutes to read the study because the findings are interesting.

The chart shows the Dow Jones transport average on the weekly scale. Notice how peak B has approached the level of A. Price eased lower in a small black candle, suggesting that the average has formed a 2B pattern, but it is a bit soon to say that with conviction. A 2B occurs when price reaches the level of a prior peak and then stalls. It may move above the prior peak a bit or fall short of it (as in this case), but when it stalls, it has a tendency to reverse the trend once price begins moving again. That is not always the case, of course, but it pays to be on the defensive.

If the average does reverse, then how far will it drop? I show a congestion zone circled in green. If you compute a Fibonacci retrace of the BC move, then the flat top in January to February 2008 matches the 38% retrace line. Combining the two features, if the transports drop, then I would expect them to behave as the green line shows on the right side of the figure.

The BC move is also a measured move up chart pattern. When price falls, it often returns to the corrective phase, which coincides with the 38% retrace line.

-- Thomas Bulkowski

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Monday, 5/5/2008. ^DJU: Utilities Heat Up

Dow Utility average (^DJU) on the daily chart

First, a few announcements. After working for days building my new flowerbed, I completed it on Saturday. Then I discovered leftover pieces -- 3 bricks -- which implies that I turned a corner in the stone work too soon (making the flowerbed too small by about a foot...these are large, 22 pound bricks). Also, the three courses of brick rise above my patio deck by 1.5 inches and that means I have to tear it all down and start over. Thank goodness I am retired! My discussion of new stock research (the RSI indicator and a trading tactic) will have to wait for another day or week. Please stay tuned.

http://www.kirkreport.com

Charles Kirk, of The Kirk Report, has given me the kind permission to post his interview of me. You can find it here, in its entirety. It is by far the best interview, mostly because the questions were so thought provoking. If you want to know how I trade and learn a lot in the process, then spend the time to read it. And then visit Charle’s site. It is worth a visit.

To the charts...

The chart shows a rising Dow utility average. What I find interesting is the price mirrors. Those help me predict, often with uncanny accuracy, where price is going to stall or even reverse. The 1s are a similar distance away and similar price level, as are the 2s and 3s. Now that price has broken above congestion, circled, I feel confident that price will continue rising.

But how far? The price mirror at 4 on the far left gives a clue. I expect price to climb to the green horizontal line. That is overhead resistance setup by the peak at 4, but also by the peak in late November, 5. If price does turn there and form a peak, then look at the weekly scale but I warn you...you should be sitting down. It would form a head-and-shoulders top. It would still have to confirm, meaning price would have to close below the neckline (see chart) and a drop of that magnitude would likely take months (I estimate 3, the same time as the May to August decline).

What do I think will happen? I think price will rise to meet overhead resistance at 4 and then stall, forming a congestion area. But I expect price to push through and make a new top, stalling at new resistance at the price level of 3 before moving to a new all-time high for the average. But a lot can change before that happens.

-- Thomas Bulkowski

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Thursday, 5/1/08: Down with Dell! Find out why.

Dell (DELL) on the daily chart

I am happy to report that I haven’t thrown out my back while playing in the mud and installing three flowerbeds. I’m on my last one now, and it should be done in a few more days. Then I can devote my attention to trading after stuffing it with flowers and vines, of course! I’m thinking poison ivy... I could use some of that to throw over the fence because my neighbor lights his BBQ grill and fills my house with smoke. People are such a delight.

The chart shows Dell (DELL) on the daily scale. I last wrote about it on March 26 when I discussed bullish divergence between the stock and the commodity channel index. I said that if price closed above the triangle, then it would be a buy (buy stop at 21.19).

Unfortunately, that didn’t happen. In fact, I have been watching the stock and saw the downward breakout. Once the stock reversed (at A) and started moving up, I guessed that it was just a pullback. As you know, 87% of the time price moves lower after a pullback. Despite the descending triangle, which breakout downward 64% of the time, I was hoping for an upset -- an upward breakout forming a busted descending triangle. Now THAT is a pattern I can get aboard! If price closes above the top trendline, then it would bust the descending triangle. Usually a good rise follows.

As the situation stands now, price is moving down, but how far will it drop? The stock has not been this low since the bear market of 2001. On the monthly scale, there are twin bottoms in September 2001 and December 2000. Both bottom near the same price, namely 16 or so. The stock closed today (Wednesday, April 30) at 18.63. Price could drop to the recent low, A, and then reverse (move back up). If it drops meaningfully (whatever that means) below A, then expect the decline to find support at 16 and change.

Does that mean the stock is a short? I will leave the answer to that question up to you. Since I do not like to short, a put is another option. I have a hard time believing that the stock will actually make it down to 16. I suspect it will bottom at A and rebound, but you never know.

-- Thomas Bulkowski

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