LITMIR.BIZ

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down, I guessed that it would break out downward on the next cross. I did research to try to prove it, and then I shorted the stock at 13.88. It was a gamble, but one I was comfortable with. I placed a stop at 14.25, just above A.”

      She snapped her fingers, “Bingo! Two days later the stock plummeted to the other side of the pattern,” touching the bottom trendline at point B. “Usually my trades aren't that easy. I lowered my stop to 15 cents above C [the nearest minor high], and waited.”

      The stock bounced off the lower trendline instead of busting through as she hoped. She decided to be patient and see what the stock did next. With her stop‐loss order in place at the breakeven price, she felt protected and comfortable letting the trade ride.

A partial rise formed before meeting resistance and heading back down. “I believed that when the stock reached the bottom trendline, it would break out downward this time, so I doubled my position.”

      She sighed. “I was wrong.”

      “It takes a big man to admit that,” I said and winked at her. The stock continued down one more day before easing higher.

      “I adjusted my stop‐loss order to include the additional shares, but kept it at the same price [13.75, C]. Then I waited.”

      The stock reached a minor high of 13.13 before heading down again. This time the decline was strong enough to punch through support at the lower trendline.

      “When the stock dropped below point B toward the end of May, I lowered my stop to 15 cents above B,” or 12.15.

      She looked at the measure rule for the price target. She calculated a target of 9.88 and wondered if the stock would really reach that price. To be safe, she decided to cash out if the stock reached 10.15, or 15 cents above the common support price of 10 (a whole number typically shows support and resistance).

      “The stock hit 10.38 on high volume. I thought it might be a one‐day reversal.” With those chart patterns, it's difficult to be sure if price would reverse or not. “I decided to hold on and kept my original target in place.”

      She pointed at the screen, “Two days later, the stock zipped higher and tagged my stop. I made only 9% and moved the profit into our emergency fund.”

      She looked at her watch and gasped. “There's a shoe store having a liquidation sale in twenty minutes. They sell Jimmy Choos. I have to go.” She raced out of the room.

9 Broadening Formation, Right‐Angled and Ascending

      RESULTS SNAPSHOT

      Appearance: A chart pattern with a horizontal (or near‐horizontal) bottom and up‐sloping top.

       Upward Breakouts

Reversal or continuation	Long‐term bullish continuation
Performance rank	18 out of 39
Breakeven failure rate	15%
Average rise	43%
Volume trend	Upward
Throwbacks	68%
Percentage meeting price target	67%

       Downward Breakouts

Reversal or continuation	Short‐term bearish reversal
Performance rank	25 out of 36
Breakeven failure rate	28%
Average drop	14%
Volume trend	Upward
Pullbacks	63%
Percentage meeting price target	40%

Before I began studying this chart pattern, I assumed price would climb away from it, simply because the word ascending was in the title. However, I believe the title refers to how the top of the pattern sees price trending upward, bouncing off a flat base.

      The pattern is a mid‐list performer, based on the rank. Even the breakeven failure rates are mid‐list (not shown in the above Results Snapshot). They are within a point of the performance rank. Volume trends upward in the pattern, and I find that unusual when compared to other chart pattern types.

      Throwbacks and pullbacks happen about twice in every three trades, so don't be fooled if the stock returns to the breakout price within a week or so.

      The percentage meeting the price target, at 67% for upward breakouts, is much higher than the 40% rate for downward breakouts, but that's typical. A downward breakout is fighting against a rising general market, so you'd expect the stock to drown.

      Let's take a tour to see what this pattern looks like.

Tour

Figure 9.1 puts the formation in perspective. There are two right‐angled broadening patterns shown in the chart. The left one is somewhat ill‐formed but better performing than the right. Both chart patterns have a base outlined by a horizontal trendline connecting the minor lows. The up‐sloping trendline skirts the tops of the minor highs. The result is a triangle‐appearing pattern with prices that broaden out. Both of these patterns have downward breakouts, but the breakout could have been upward, too. In fact, upward breakouts are favored (slightly).

Figure 9.1 Two right‐angled ascending broadening formations bounded by a horizontal base and up‐sloping trendline. Price declines after a downward breakout.

      Why do right‐angled ascending broadening formations form? Consider Figure 9.2. The rise began in mid‐December 1991 on volume that was higher than anything seen in the stock for almost 2 months. By late February, the stock had reached a new high and was rounding over after meeting selling resistance at 14. The stock returned to 12.25 where it found support. At that point, it paused for about 2 weeks and established the base on which a trader could start to draw a horizontal trendline.

      The reason for the horizontal trendline is one of perceived value. As the stock approached the $12 level, more investors and institutional holders purchased the stock. The desire to own the stock at what they believed a good value outweighed the reluctance of sellers to part with their shares. The buying demand halted the decline in the stock and eventually sent price skyward again. This happened in mid‐April as volume spiked along with price. The buying enthusiasm caused the stock to reach a new high.

      Momentum was high enough so that the next day, price rose even further before closing lower. With the second peak, a tentative trendline drawn along

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