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. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into seven languages. He may be reached at

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Bulkowski's Trade in Encore Wire

Market

Industrials (^DJI):

Transports (^DJT):

Utilities (^DJU):

Nasdaq (^IXIC):

S&P 500 (^GSPC):

As of 02/03/2012

12,862 156.82 1.2%

5,369 63.27 1.2%

451 1.52 0.3%

2,906 45.98 1.6%

1,345 19.36 1.5%

YTD

5.3%

7.0%

-2.9%

11.5%

6.9%

Tom's Targets Overview: 02/03/2012

13,100 or 12,400 by 02/15/2012

5,500 or 5,150 by 02/15/2012

470 or 440 by 02/15/2012

3,100 or 2,800 by 02/15/2012

1,375 or 1,300 by 02/15/2012

Test Portfolios and CPI

Indus. strength: 4.3%

Mutt Losers: None YTD

Mutt Winners: 2.4%

Wilder RSI: None YTD

CPI:

on 12/20/2011

How to Make 20% by Getting WIREd

Encore Wire: How to Make 20% by Getting WIREd

Encore Wire Corp (WIRE) on the weekly chart

I show two charts of Encore Wire (WIRE), one on the weekly scale (top) and the other on the daily (bottom). Price formed a rounding bottom, outlined by the green line.

Encore Wire: Identification

Rounding bottoms are not the easiest chart patterns to identify because the turn is slow, long, and you are searching for it midway through development. The weekly scale makes identification easier, so try that. Look for a graceful turn, supported on the bottom by a congestion zone. Notice how graceful the rounding turn looks on the weekly chart (right).

On the daily chart (below, right), notice the abrupt move up from A to B with price at C returning back to near the launch price of A. This brief move up (forming a double bottom, really) is common for rounding bottoms after the stock passes the midpoint. If you see this behavior, you can buy in with confidence near C. It does not always occur but when price sinks from B to C, it is no time to panic. The stock should find support at the bottom of the turn. And if not, then a stop placed below support will help limit the loss.

Encore Wire: The Buy

I bought the stock with a buy stop at B, when price moved above the congestion zone. If you cover up the right part of the chart after B, then you can see how I might think that price would continue moving up in a rounding turn. The brief climb to H I thought was the common bump up that I expected (instead of the A B C move).

Encore Wire Corp (WIRE) on the daily chart

My buy stop was at 17.73 and the order filled at 17.72. On the buy day, price peaked at 17.93 and in the coming days, the stock plummeted like a skydiver jumping off a cliff, bouncing off the rocks along the way down.

The company serves the home building industry, which is weak, and that made me nervous as price dropped.

Low priced stocks tend to be more volatile than high priced ones, so I hung in there. I saw the long support zone setup by the rounding bottom and hoped that price would find support at 15 or above. I set my stop at 15.16, or 14.4% down from the buy price. At C, the stock came within 3 cents of being stopped out.

After bottoming at C, the skydiver began climbing back up the mountain. Then the company announced earnings after the close of trading in late April (far right on the chart). I read the announcement and thought that it sounded positive, but anything can happen to price; the market decides whether or not it is better than expected. The gap up shows its conclusion.

Encore Wire: The Sale

I happened to be adjusting my stops online just after the market opened and saw the stock was up dramatically. I thought about it and decided to sell, receiving a fill at 22.

The reason for selling is that I believe price will retrace some of the gain to D, but how far price drops is anyone's guess. This is an example of an inverted dead-cat bounce, one of my favorite event patterns.

After the retrace, I expect the stock to climb again to E where it should run into overhead resistance setup by the flat tops at G, but it could stop earlier (anywhere from 24 to 27). Then it should form a handle, F, a congestion region to the right of the cup lip.

After that, expect price to move up, but that is well into the future. In short, I sold because I did not want to give back my hard earned gains in this volatile market. As the saying says, if the market gives you a gift, take it. I made 24% in about 2 months.

Encore Wire: Trading Setup

How can you duplicate this trade in other stocks and earn over 20%? Here's what to look for.

Find a developing rounding bottom or cup with handle pattern. Try the weekly scale for easier identification.
Buy near the bottom of the cup, if possible.
Expect a bump up somewhere after the mid point, but it does not always occur. See rounding bottoms for more details. For a lower entry price, buy into the stock after the bump returns the security back to near the launch price. Often the stock will stop just above the launch price.
Place a stop below the bottom of the cup or other support region. Move it up as price rises.
Look for overhead resistance that would form the right cup lip and sell when price nears or reaches it.
Do not expect a handle to form and price to continue rising after the right cup lip. It may not.
Price may form a descending scallop, so watch for that to occur and trade appropriately.

The Encore Wire stock on the daily scale

Encore Wire: Aftermath

The chart shows what happened to the stock after I sold.

Price moved up to a new high and then eased lower, along with the general stock market.

Price continued dropping during the 2008 bear market and sank from about 25 to 13 and change in November 2008.

Selling was a bit premature, but it was the right decision.

-- Thomas Bulkowski