Bulkowski's Energy East Trading Quiz

The head-and-shoulders bottom appears clearly formed, but price is heading down.

Question 1: Do you buy? From my notebook: "Date Bought: 12/8/2005. Market order filled at 23.12. Question 3. Stop: 22.41 or 3.4%. The stop is just below the head, which has a low of 22.50.

Upside target (Question 2): 25.65, the lower end of congestion in Aug 2005, which is the bottom of the triple bottom.

Score and price target: -1. Target: 29.93. 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.

Stock rank: 37 out of 45, and industry rank: 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.

Support and resistance: about 25, which is the price of the Nov 2005 descending triangle, more at 25.65, at 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."

From my notebook: "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 because it may mean it's about to tumble.

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

This is a chart of the CCI (commodity channel index), lower panel. The indicator trends up (higher lows, lower panel, green line) while price trends down (lower lows, upper panel, diagonal red line). 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 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.

Here's my notebook entry for the sale.

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.

The stock moved sideways for 3 months and formed a triple top (two of the three tops are shown in January and February) before dropping down below my stop price of 22.41 in late May. The stock did not reach the scoring system's target of 29.93 before price closed below the bottom of the head-and-shoulders bottom. The scoring system predicted (with a -1 score) that it would be difficult to reach the target. In other words, the prediction of avoiding trading this stock was correct.