Respect the Head and Shoulders formation

As part of the ongoing effort to learn from mistakes, I present you the single largest mistake made by CPI. Force Protection Inc. (FRPT)

FRPT formed a text book head and shoulders pattern from January 2007 to November 2007. The psychology of this pattern is powerful. Any buyer that missed the May 07 peak is angry, only to become angrier after missing lower high in Oct 07. Stock breaks down from the shoulders (prior support) and recovers back to the old support area. Unfortunately, that support is now acting as resistance and completes the head and shoulders pattern. At that point, the stock is doomed to fail and has a target low equal to the distance from the shoulders to the head.

We bought FRPT after it formed the right shoulder at about $15. The stock promptly crashed to $12 then recovered to $15 within two weeks. We should have sold for a $.30 profit per share. But NOOO, we held on all the way to $9.40 making it the worse trade ever for the investment club. Holding on to $6 would have resulted in negative account balance due to margin use. BTW, it made it down to $1.01 before recovering to $3.25.

Lessons learned

--Respect the head and shoulders

--A declining stock is not a good deal until it stops declining

Cost of Lesson

-- ($5,316) hit to the CPI account and a battered ego for JJ