at 15.31 the day before the actual breakout. Instead, I bought in at 15.81, but that isn't too far off the optimal entry price.
From my trading notebook: “Mood (Will trade work? Bought too soon?): Cautious. Other airlines are moving lower, so I don't really trust this one. Long term, I think the price is a good one. Short term, who knows?
“Buy reason: Throwback from RABFD completed and oil prices are trending down. Since most of the fuel is hedged, the price won't make much difference. If it can push through the HCR [horizontal consolidation region] (flag in Dec 2003), then this has a chance of moving up.”
The stock formed a second broadening pattern and that one broke out upward, too, making a sharp rise upward (5% rise) in one day. The move looked like an earnings surprise where price shoots up and then retraces the move over the following week to 10 days. That's what happened here, except earnings came out a few weeks later.
My notes say I should have sold the day of the 5% spike and locked in a profit. Instead, I took a 3% loss when the stock returned to the price of the top of the broadening pattern, where I sold.
Lesson: When the market gives you a gift (the 5% rise), find the reason for the move and consider selling.
I don't know if that's good advice or not. In earnings surprises, it can pay to hold on for months because the announcement generates excitement and that excitement pushes the stock up (after the retrace that is). In this case, I don't know what caused the 5% rise.
Con‐way
Con‐way Inc. (CNF, now CNW) formed a broadening pattern starting in November 2003 and lasting until April 2004. Here's my notebook entry: “21 April 2004. I bought at market, filled at 37.13, 11:06 am. This is an upside breakout from a right‐angled broadening formation, descending. Measure rule says 41.14 is the target, call it 41. Downside is just below prior minor low, 34.33 for 8% loss. The truckers are doing well right now, despite wishy‐washy market and high fuel costs. The company also announced earnings that apparently were better than expected.”
I bought the day after the upward breakout. Over the next two weeks, the stock threw back, but I survived by holding on. My fingers hurt.
The stock started climbing in a measured move up type pattern (rise, retrace, rise). I raised the stop not once, nor twice, but seven times along the way to the sale.
On 12 July, the stop‐loss order took me out of the trade. From my notebook: “Mood (Sell too soon?): Good. The stop took me out and this morning [the stock] is trading even lower. Earnings are due in 5 days, so maybe the stock is signaling weak results. Time to move on as it pierced the trendline on the sell day.”
What trendline am I referring to? The only idea I have is to draw one connecting the throwback low along the bottoms as price climbed. The stock broke out of a 10‐day congestion region and pierced the up‐sloping trendline at the same time. That's when I sold.
I made 8% on the trade, but sold too soon. Yes, the stock moved sideways for almost 3 months but eventually made its way to 61.87 or 54% higher than where I sold.
For a swing trade (it wasn't supposed to be), this was a good execution. I bought the day after the breakout and sold before weakness took the stock lower and threw it sideways to down for months. For a longer term position trade (which was intended), I missed the big gain. Again.
Lesson: When position trading, allow for more volatility to capture longer‐term gains.
Sample Trade
Ralph is a pattern trader with a measure of experience milking chart patterns for all they are worth. When he noticed what he thought was either a descending broadening wedge or a right‐angled descending broadening formation, he bought the stock. His order, placed at point C in Figure 10.7 (46.38), was just after the stock bounced off the lower trendline.
He monitored the stock closely and watched it move up the very next day, then ease lower.
Figure 10.7 This descending broadening pattern has an upward breakout. To compute the measure rule for upward breakouts, find the difference between the high and low in the formation, denoted by points A and B. Add the height to point A to get the upward breakout target price. It took almost 7 months for price to exceed the target. A small symmetrical triangle appears at point C.
“After a few days, I saw the symmetrical triangle form and got worried. Those things are unpredictable.” When the stock moved below the lower triangle trendline, Ralph sold the stock and closed out his trade at 46.50.
He cleared the image on the screen and looked at a chart without any lines or indicators. Just price.
Ralph smiled. “I made the right decision to sell because a partial rise,” such as where the triangle formed, “can predict an immediate downward breakout.”
Sure enough, the following day price dropped even further, tagging the broadening formation trendline again.
“Then the blasted thing bounced on me. Caught me by surprise. I wasn't in the stock then, but I like to think I made the right decision to sell. The thing went all the way back up to A, right where I hoped it would go during my trade. But nooo!”
Ralph took a small loss after factoring in commissions.
“I sold at the right time. The stock broke out downward from the triangle and could have continued a lot lower. In hindsight, though, I could have waited to see if the stock found support at the lower trendline. It was close enough that I could have tolerated the potential loss. In this case, all I had to do was wait no more than 3 days before price started climbing to A.”
11 Broadening Tops
RESULTS SNAPSHOT
Appearance: Price trends upward leading to the chart patterns. The pattern has a megaphone appearance with higher highs and lower lows that widen over time.
Upward Breakouts
| Bull Market | Bear Market | |
| Reversal or continuation | Long‐term bullish continuation | Intermediate‐term bullish continuation |
| Performance rank | 22 out of 39 | 14 out of 20 |
| Breakeven failure rate | 18% | 18% |
| Average rise | 42% | 25% |
| Volume trend | Upward | Upward |
| Throwbacks | 67% |
|