IBD Meetup

1. IBD Meetup Chart School and Pattern Recognition, Module-3 Common Secondary Chart Patterns (Adding to Existing Positions)

2. Chart School and Pattern Recognition • William J. O’Neil quote from “How to Recognize Great Performing Stocks Pamphlet Series.” • “But, here is the real secret that only one in every hundred or so investors understand and use with any skill. You must learn how to read and interpret daily, weekly and monthly price and volume charts that can tell you if a stock is behaving properly or not and if it is under accumulation (institutional buying) or not. Charts measure the actual supply and demand for a stock in the real marketplace and the best, least risky time to begin your buying and the worst, most risky times to buy or continue holding a stock. This is an enormous advantage when you combine it with a stock’s superior fundamentals like strong earnings and sales.”

3. Chart School and Pattern Recognition • Primary Chart Patterns • Many CANSMLIM investors use primary chart patterns to initiate an initial position in a stock. • These are the entries that are the easiest to identify, take a long time to develop, are easy to enter, and offer the highest probability of success. • Secondary Chart Patterns • Many CAN SLIM investors use secondary chart patterns to add shares to an existing position in a stock. • These are more difficult to properly interpret, develop more quickly, are more difficult to enter properly, and offer a lower probability of success.

4. Chart School and Pattern Recognition • Primary Chart Patterns • Cup with or without Handle - Most Important Pattern • 7 Weeks Minimum • 20-30% Maximum Depth, up to 50% in Bear Markets • Double Bottom – Very Important Pattern • 7 Weeks Minimum • 35% Depth, up to 50% in Bear Markets • Flat Base – Very Important Pattern • 5 Weeks Minimum • 15% Maximum Depth • Square Box • 4 Weeks Minimum • 15% Maximum Depth • Saucer with Handle • 7 Weeks Minimum • Usually more shallow than cup and more spread out • 12-20% Maximum Depth, up to 30% in Bear Markets

5. Chart School and Pattern Recognition • Primary Chart Patterns continued • Ascending Base • 9-16 Weeks • 10%-20% Depth for each pullback • High Tight Flag • Flagpole • Stock usually doubles in price (100 to 120%) • Length is typically 4 to 8 weeks • Flag • Corrects no more than 10-25% • Length is usually 3-5 weeks • Shakeout Plus Three (Similar to Double Bottom). • 7 Weeks Minimum • 35% Depth, up to 50% in Bear Markets • IPO Base • 3-4 Week Minimum • Usually corrects no more than 15-30% • Initial Base • 20-30% Uptrend not necesarily required.

6. Chart School and Pattern Recognition • Secondary Chart Patterns - Traditional • Correction and Rebound from 50 Day Moving Average • Three Weeks or more Tight • Short Stroke

7. Chart School and Pattern Recognition • Secondary Chart Patterns – Non Traditional to be reviewed at a later date • 12 of 15 days Up • Confluence of 10, 21, 50, and 200 Day Moving Averages. • Momentum Gap • Stock Corrects 10% • Support at the 10 DMA • Daily or Weekly Shakeouts • Pocket Pivot

8. Chart School and Pattern Recognition • Correction and Rebound from 50 Day Moving Average • The 50-day moving average price line (the 10-week moving average price line on a weekly chart) is one of the most widely used moving average lines used by investors and analysts. • Institutional investors have huge portfolios and they have to build their positions over longer periods of time. For the stocks that the institutions truly believe in, pullbacks to or slightly below the 50-day are viewed as great opportunities to add to their positions while keeping their average cost down. This extra buying causes a bounce off the line, and gives some investors confidence because institutions have “supported” the stock. • How do you take advantage of this as an individual investor? Consider adding to the better performing stocks of your portfolio if they bounce off of this line.

9. Chart School and Pattern Recognition • Correction and Rebound from 50 Day Moving Average – Continued. • After a stock breaks out of a 1st or 2nd stage base it is generally safe to add shares, the 1st or 2nd time it pulls back to its 50 DMA. Many big winners will pull back to their 50 DMA 2, 3, or even 4 times. • These pullbacks should occurs on relatively light volume and small spread. • The rebound off the 50 DMA should occur on heavier volume and wider spread. • The buying range is between the 50 DMA and 10 cents above the prior peak.

10. Chart School and Pattern Recognition – Correction and Rebound from 50 Day moving Average Weekly

11. Chart School and Pattern Recognition – Correction and Rebound from 50 Day moving Average Daily 2nd Stage Base

12. Chart School and Pattern Recognition • Three Weeks or more Tight • Buying by institutional investors can be seen in a very subtle way by looking at tight areas. • There are two things we check for tightness • The range between the high and low for a given week. The range of a stock is shown by the vertical price bar. On a weekly chart, the top of the bar shows the highest price the stock traded for the week and the bottom of the bar shows the lowest price the stock traded for the week. A long vertical bar, or looseness, suggests investors are uncertain as to where a stock should be priced. Conversely, a short vertical bar, or tightness, suggests that buyers and sellers are closer to agreement on the stock’s price. • Closing prices remaining relatively unchanged for a number of weeks. Institutions may give their traders instructions to accumulate shares up to a certain price. Any selling pressure on the stock is soaked up by the institutions accumulating shares in this manner. Much of this action takes place late in the week, so each week closes relatively unchanged from the prior week. Additionally, if the tight closes occur after the stock has staged a move up, it shows an unwillingness of investors to give up their shares. The signal to watch for is three weeks in a row, or more, of tight closing prices. Buys can be made as the price moves up out of the short consolidation area.

13. Chart School and Pattern Recognition • Three Weeks or more Tight • View on a Weekly Chart. • The more extended this pattern is from the primary chart pattern, the greater the risk of failure. • The pattern occurs when week 2's close is within 1% of week 1's close, and week 3's is within 1% of week 2's close. • Confirm a tight “range” visually. No math definition exists for this. • The proper buy point is 10 cents above the high in the pattern.

14. Chart School and Pattern Recognition – Three Weeks Tight Weekly

15. Chart School and Pattern Recognition – Three Weeks Tight Daily

16. Chart School and Pattern Recognition • Short Stroke • Best viewed on a Weekly Chart. • Two week Pattern. First week begins with a major surge in price. The second week of the pattern, trading will be very tight. • Generally, the high in the pattern is in the first week. • Generally, the second week closes very near the close of the first week. • The high price in the 2nd week is generally not higher, than the high of the first week. • Volume in the 2nd Week should be lighter, than the volume in the first week. • Add 10 cents to the high in the pattern.

17. Chart School and Pattern Recognition – Short Stroke Weekly

18. Chart School and Pattern Recognition – Short Stroke Daily

19. Chart School and Pattern Recognition • Other Resources • IBD University - Charting the Course Series • How to Make Money in Stocks by William J. O’Neil • IBD Pamphlets • Chart School Home Study Course