a long‐term holding. I noted that the downside was 15.66, the bottom (start) of the broadening pattern. If the stock dropped that far, it would hand me a (potential) loss of 25% (however, the lowest the stock dropped was 17.69, about a year after I bought). The potential loss was well above the usual 8% or less I like to see, but this wasn't a trade, but an investment. I made allowances.
Upside targets were 28, 56, and 69. I also made mention in my trading notebook about this stock breaking out of congestion. It was a small knot, about a week long of sideways price movement. I seemed excited about that for some reason.
Indicators? Sure. Why not? Wilder RSI was overbought. Commodity channel index said sell 5 days ago (the day price broke out upward, which was a bad call). Bollinger bands were following volatility higher. It suggested waiting for a throwback that didn't happen (and a missing throwback suggests better performance, of course, from Table 9.4).
My computer informed me that volume was not rising consistently over the past 3 weeks, and warned of a higher failure rate for the trade because of it. Hmm. However, it patted me on the back about picking a stock with a rising relative strength against the S&P 500 index (that is, the stock was outperforming the general market).
Here's my notebook: “Buy reason: congestion breakout with high long‐term potential. Risk 25% versus >100% reward. Could be exposed to hurricane losses if any storms brush [the] east coast. Its reinsurance business could get nailed, [caused by] hurricane losses. Placed a market order to buy at the open since the daily swing is all of 70 cents. Big deal. Bid/ask spread suggests an open higher by 3 cents, but we'll see. Futures at +6.50, so mildly higher open.”
Nothing really exciting there except for the potential to double my money. All I had to do was hold on long enough for that to happen.
Fast forward to 2018. Along the way, the stock dropped from peak to valley 30%, 25%, and 28%, in that order, but the stock always recovered. This was a buy‐and‐hold situation, and I was looking to make the big bucks, a doubling of my money.
On March 5, the company announced that it would be taken over by another company. The news upset me. Why? Because I felt they were buying the stock on the cheap. On the weekly chart, this was a cloudbank play, with the base of the cloud at 56 and the top of the cloud at 82. Their offer took me out of the stock at 57.60, below where the stock had once traded (at 82). Recall, my upward target was 69 and they were cashing me out just above my middle target, 56.
I made 198% on the trade, including dividends. I almost tripled my money, but it took 8 years to do it. In terms of dollar profit, this was my second most profitable trade (but well down the list in percentage terms), so I put a lot of cash behind it.
Lesson: Good things can happen to people who wait.
Lesson: For a buy‐and‐hold investment, you have to be able to tolerate large price swings.
Sample Trade
Palmer sat at his computer desk. His foot hammered the carpet, and his fingers drummed the desk. It looked as if he swallowed too much caffeine. I am sure you have met the type.
Faced with the situation shown in Figure 9.5, he took swift, decisive, maybe even impulsive action. At point A, where the stock touched the top trendline, he quickly sold it short and received a fill at 33.38. He placed a stop at 34 in case the trade went against him. Then he waited.
It did not take long for the stock to cross the broadening top and reach the horizontal trendline.
Figure 9.5 Shown are price targets using half and full formation heights for the broadening top formation.
His fingers stopped moving, and he pointed at the screen. “I should have placed an order to cover my short at 29.38. That's the value of the bottom trendline. Look what happened.”
Price bounced off the low. He covered his short the following day, shown as point B, at 30.50. Immediately, he went long and bought the stock at the same price.
Palmer placed a stop‐loss order just below the horizontal trendline, at 29.25, just in case. Then he extended the top trendline. “I worried that the stock might not reach it, so I put a target below the old high at A.”
In less than a week, the stock reached his target and sold at 33.50 (point C). Since the stock was still showing an upward bias, he held off trading and waited for the trend to reverse. Three days later he sold the stock short again at 33. This time, he put a sell order above the lower trendline at 29.50.
“The stock moved against me. Made me nervous.”
I wondered what that would look like. He was already twitchy. He couldn't sit still.
The stock rose to 34 and oscillated up and down for nearly 3 weeks, never quite reaching his stop‐loss point of 34.38. Then the stock plunged and zipped across the chart pattern. It hit his target price at point D, and he covered his short.
Sensing a shift in the investment winds, he went long on the stock at the same price but put a stop‐loss order below the lower trendline. “The following day, I was stopped out at 29.25 and took a small loss.”
“Then what did you do?” I asked.
He reached for his coffee mug, found it empty, and left the office for a refill. I never did get an answer to my question.
10 Broadening Formation, Right‐Angled and Descending
RESULTS SNAPSHOT
Appearance: The pattern has a horizontal top with lower lows following a down‐sloping trendline.
Upward Breakouts
| Reversal or continuation | Long‐term bullish continuation |
| Performance rank | 19 out of 39 |
| Breakeven failure rate | 21% |
| Average rise | 43% |
| Volume trend | Upward |
| Throwbacks | 64% |
| Percentage meeting price target | 65% |
Downward Breakouts
| Reversal or continuation | Short‐term bearish reversal |
