TZOO: Technical Analysis 101 (2004-2005)

(Click On Chart To Enlarge)

"Hi Melf, If you don't mind, can you take a look at TZOO's chart? I'm learning TA now and TZOO really confuse me.

Thanks

Richard"

Hi, Richard,

Unfortunately, the constraints of my own workload don't afford me the time to analyze stocks that other people are interested in, however, since I've already done hours of chart analysis on TZOO over the years, and since there are so many things in the chart that are instructive (as there are in ANY chart), I'll go ahead and make an exception here, and offer you some comments.

My first comment is that if you are confused about TZOO (or any other stock), don't take any position in it. "When in doubt...stay out!"

Wait until you KNOW something. I don't mean "know the future," I mean KNOW what the chart is telling you. Let's look at several examples of that, beginning back in 2004-2005.

Pattern #1: Head & Shoulders Top (pattern in blue)

When TZOO broke below that neckline, Sell. And, it's fine to Sell Short there, because KNOW that the pattern broke down, which put a target of 70.76 IN PLAY, and that it's bearish.

Where would we KNOW that we might have it wrong? At a print above 96.95, which is the high of the Right Shoulder (RS) of the Head and Shoulders Top pattern. That "shouldn't" get taken out to the upside after the pattern breakdown, and if it does, we Buy To Cover our short, and take the loss.

I've got "shaken out" on a few of those, where the stock prints 97.00, stopping me out, then it tanks. That's very frustrating, to say the least, but the majority of plays WITH THE TREND will work out.

Pattern #2: The Second Head & Shoulders Top: (pattern in purple)

Same thing. Sell the neckline breakdown, and it's fine to Sell Short, too. We KNOW that it broke down, and we KNOW where we will put our stop if we Sell Short: above 84.29, the high of the Right Shoulder, same as last time.

Pattern #3: The Third Head & Shoulders Top: (pattern in red)

Do it again. We KNOW that the neckline broke down. Sell. And, Sell Short is fine again. After the breakdown, breakdown TZOO went back above the neckline giving the shorts a few days on The Anxious Bench, but than broke down again.

These three patterns form a "nested" (one within the other) TRIPLE HEAD AND SHOULDERS TOP. Very bearish!

At the time, short interest was huge...something like 60-80% of the shares were held short. So, we might conclude:

1. The shorts are wrong, and they're going to get clobbered.

2. TZOO had been at $110, so it was very cheap at $50.

3. TZOO also was cheap based on the fundamentals.

ALL of those three conclusions would have gotten us into trouble because we KNOW that the chart had a terrible bearish breakdown, and we would have gotten caught in "our opinion," rather than focusing on what we KNOW has happened in the chart.

Looking at the chart as it stood, it makes much more sense to conclude:

1. When a chart is bearish, the shorts are right.

2. In a bear market, "cheap can get a lot cheaper."

3. When the fundamentals and the technicals disagree, defer to the technicals to extent that it seems warranted. TZOO had put in a nested TRIPLE H&S TOP!!

That suggests significantly lower prices in the stock, and if we still like the fundamentals, we can buy it later on because we KNOW that we've been warned three times to GET OUTTA THERE.

Next post, we'll see what happened from there, and see if we KNOW anything different. Not "know the future," because we can't do that. But, we can see if we KNOW anything from the chart.