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IBD Meetup. Chart School and Pattern Recognition, Module-2 Primary Chart Patterns (Establishing Initial Positions). Chart School and Pattern Recognition. William J. O’Neil quote from “How to Recognize Great Performing Stocks Pamphlet Series.”
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IBD Meetup Chart School and Pattern Recognition, Module-2 Primary Chart Patterns (Establishing Initial Positions)
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.”
Chart School and Pattern Recognition • What we will not learn in this week in Chart School. • How to properly interpret whether or not the base formations we are beginning to study are proper. This will occur later in the series. • When to sell for a loss or when to sell for a gain. • What we will learn this week. • Begin to recognize chart patterns, that an experienced investor would use, to initiate an initial position (B1) in a CAN SLIM stock. • Many experienced CAN SLIM investors will initiate positions as follows: B-1 50% at the pivot point, B-2 30% at 2.5% above the pivot point, and B-3 20% at 4-5% above the pivot point. • The patterns we are looking at this week are the patterns that offer the highest probability of a positive outcome. This is why many experienced CAN SLIM investors initiate positions using these chart patterns.
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
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.
Chart School and Pattern Recognition • Secondary Chart Patterns - Traditional • Three Weeks Tight • Short Stroke • Soft Correction and Rebound from 50 Day Moving Average • Regaining the 50 Day Moving Average on Very Heavy Volume • Secondary Chart Patterns – Non Traditional • 12 of 15 days Up • Confluence of 10, 20, 50, and 200 Day Moving Averages. • Momentum Gap • Stock Corrects 10% • Support at the 10 DMA • Daily or Weekly Shakeouts • Pocket Pivot • Other Important Base Topics. • Base Counting and Base Reset • Base on Base • Analyzing the quality of a Base
Chart School and Pattern Recognition • Cup No Handle. • Length - Normally 7 to 65 weeks or even longer. Usually last 3 to 6 months. • Depth – Can be from 12-15% range, sometimes up to 33% in normal markets. A very small number can be as deep as 40-50% in severe bear markets. Stocks that drop as much as 50% or more tend to fail 5-15% beyond their price breakouts. There are exceptions to this. Some will work even if they correct 2 to 2.5 times the markets average declines. • Start counting with first week that shows a "weekly closing loss" at the beginning of pattern. • Pivot Point is the Highest point in base plus 10 cents. • Shape looks like a tea-cup when viewed from the side. Should be rounded and give the appearance of U rather than narrow V. This characteristic allows the stock time to proceed through a needed natural correction, with 2 or 3 little final weak spells around the lows of the cup. This is important because it scares out the remaining weak holders and takes other speculators attention away from the stock. A more solid foundation of owners who are less apt to sell during the next advance is thereby established. Stocks that come straight off the bottom can be more risky because they have no pullbacks. • Desirable for entire base to have more up than down weeks in above average tradeand more up days than down days in above average trade. • Be careful of wide and loose patterns. The easiest way to spot a wide and loose pattern is to compare the stocks action in the current base with the stocks action prior to the current base. • Stock should have a 20-30% Prior Uptrend, Improving Relative Strength, and a very substantial increase in trading volume somewhere in the prior uptrend.
Chart School and Pattern Recognition • Cup No Handle continued. • Be cautious with some cup shaped bases that don’t have a handle, especially if the right side is “straight up from the bottom.” • Can have higher failure rate than cup with handle at the end of Bull Markets. • More rare during some cycles. • More likely to be successful at the beginning of a new bull market • Occur more often in small or midcap stocks. • Because they can be more risky it is a good idea to confirm they have: • Strong Earnings • Good Sponsorship
Chart School and Pattern Recognition Cup Schematic
Chart School and Pattern Recognition – • Cup with Handle – Most Common Pattern • Cup Details Spelled out on Cup Base with No Handle Slide. • Handle Characteristics • Length - at least 1 week. • Depth - preferably 8-12%, can be up to 12%-15%. At the end of a bear market a handle can be as deep as 20-30% and still work if the market follows through(This is extremely rare). • Pivot point is the High of the handle plus 10 cents. • At the Pivot Point volume (daily and weekly) should be 25-50% above average, sometimes this volume takes a few days to develop. • Handle should form above the 10 Week Moving Average • Handle should drift downward with volume drying up. • Handle should have relatively tight price action. There should not be wild price action in a handle. • Midpoint of the handle should be above the midpoint of the base. • Preferably the handle should start within 15% of the previous High. A handle can also form slightly above previous high. • A handle that drifts upward along its price lows is not good. This is called “Wedging.”
Chart School and Pattern Recognition – • Cup with Handle schematic. • Midpoint of the Handle must be above the Midpoint in the Base • (High of Cup – Low of Cup ) <= (High of Handle – Low of Handle ) • High of the Handle must be within 15% of the High of the Cup. • ((High of Cup – High of Handle) / High of Cup) <= 15% or (.15) • <= 15%
Chart School and Pattern Recognition – Cup with Handle Weekly
Chart School and Pattern Recognition – Cup with Handle Daily
Chart School and Pattern Recognition – Cup with Handle Weekly
Chart School and Pattern Recognition • Double Bottom – see also Shakeout plus 3 • Base Length - usually 7 weeks to a year or more. • Typically not more than 40%, but still usually corrects no more than 50% from the peak in a bear market. • Pivot point in base is middle of W, or a handle if one should form. • Shape is similar to the letter "W" • Left side of base you prefer to see 4 or 5 weeks, especially if on the heels of a sharp move up or as a later stage base. There should be at least 3 Weeks down to the first bottom then 1-2 up to the middle of the W. • Correction in base - movements in price sharper and tends to be more severe than "Cup and Saucer shaped Bases." • High in middle of W should be below the high point in the overall base pattern. • Base characteristics - usually second bottom slightly undercuts the first bottom, preferably by a few points. This scares out the weaker holders with new lows. • Stock rallies off the lows quickly, as big money rushes in to drive up stock.
Chart School and Pattern Recognition – Double Bottom schematic.
Chart School and Pattern Recognition • Flat Base • Base Length is usually 5 weeks or more. Can last up to 13 weeks or even a year. • Correction in base is usually less than 10-15%. • Pivot Point is Highest point in base plus 10 cents. • Start counting with first week that shows a "weekly closing loss" at the beginning of pattern. • Hallmark of these is tight trading. • Volume should be low, as if the stock is setting up while nobody is paying any attention. • Typically not a first stage base. Usually form after running up 20% from a cup with handle or a double bottom. • Usually a well defined floor, or support, where price lows seem to hold and bounce from. • On the flip side there’s a ceiling or resistance level where price highs will touch then back off. • Stock needs a 20-30% Prior Uptrend, Improving Relative Strength, and a very substantial increase in trading volume in the prior uptrend.
Chart School and Pattern Recognition – Flat Base schematic.
Chart School and Pattern Recognition • Square Box Base • This formation typically lasts from 4-7 weeks. • Doesn't correct too much (usually 10-15%). • Pivot Point is Highest point in base plus 10 cents • Start counting with first week that shows a "weekly closing loss" at the beginning of pattern. • Normally forms after moving up from a cup with handle or double bottom. • Sideways action is preferred to an upward or downward tilt. • Pattern has a square boxy look. • Volume should dry up in base just like Flat Base. • Need Prior Uptrend of 30%.
Chart School and Pattern Recognition - Square Box Base Weekly
Chart School and Pattern Recognition - Square Box Base Daily
Chart School and Pattern Recognition - Square Box Base Weekly
Chart School and Pattern Recognition • Saucer Base - With Handle. • Base Length - 7 weeks to a year or more. • Correction in base more shallow - usually only 12%-20% from peak, up to 30% in Bear Markets. • Shape similar to Cup but more shallow and more spread out. • Usually Big Cap stocks that are slower moving • RS Rating can be much lower at the breakout, 50-70 is OK. 85 or higher is preferred for most base patterns. • Handle Characteristics • Length - at least 1 week. • Depth – no specific requirement, should not undercut the low of the base. • Pivot point is the High of the handle plus 10 cents. • At the Pivot Point the volume (daily and weekly) should be 25-50% above average, sometimes this volume takes a few days to develop. • Should drift downward with volume drying up. • Should have very tight price action. • Should form above the 200 day moving average.
Chart School and Pattern Recognition – Saucer with Handle Weekly
Chart School and Pattern Recognition – Saucer with Handle Daily
Chart School and Pattern Recognition – Saucer with Handle Weekly
Chart School and Pattern Recognition – Ascending Base • Ascending Base • Base Length is typically 9-16 weeks • Correction in base for each of 3 pullbacks is 10%-20% from previous peak • Pivot point is breakout above left side high of 3rd pullback • Ascending bases are easy to miss. And they're rare. But it could pay handsomely to find one, as they are among the most powerful signals a stock can offer. • Normally not a first Stage Base. • Normally, the pattern tells the story of a stock that is trying to climb, and would indeed be rising if not for a stuttering or correcting stock market. • Usually happens when the market is, moving sideways, down trending, or choppy. The stock will attempt to move higher while the market remains weak. When the market finally turns around and becomes bullish the stock shoots much higher. Often formed when a strong stock resists general market weakness. • Occurs midway along a move, after a stock has broken out of a cup with handle or double bottom base. • Shape has 3 pullbacks ranging from 10-20% with each high point higher and a each low point higher, as well. Pattern still shows an overall uptrend.
Chart School and Pattern Recognition – Ascending Base schematic.
Chart School and Pattern Recognition – Ascending Base Weekly Note 3 Weeks Tight Prior to Asc Base
Chart School and Pattern Recognition – Ascending Base Weekly
Chart School and Pattern Recognition – High Tight Flag • 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 • Pivot Point - breakout through peak or highest point of the flagpole. • Rare Chart Pattern, but considered a valid bullish base formation. • Usually occurs when a lesser known company suddenly has a important new product that is driving a rapid dramatic increase in earnings, as much as 100 to 500%. • Use caution with this pattern as is very risky and difficult to interpret properly. • Shape has 2 parts: a "flagpole" (rapid advance) and a "flag" (shallow correction at the top).
Chart School and Pattern Recognition – High Tight Flag • High Tight Flag Schematic
Chart School and Pattern Recognition – High Tight Flag Weekly
Chart School and Pattern Recognition – High Tight Flag Daily First High Tight Flag Second High Tight Flag
Chart School and Pattern Recognition – High Tight Flag Weekly
Chart School and Pattern Recognition • Shakeout plus 3 – An Advanced Technique • Usually, but not always an early entry into a Double Bottom Base. • This pattern happens occasionally. Spotting it may get you a head start on a big winner. It is a technique William J. O’Neil learned from Jessie Livermore. • Alert investors can use the plus-three approach to chart a more aggressive buy point, rather than waiting for the normal buy point in a double bottom, 10 cents above the middle of the "W." • In a shakeout-plus-three, find the low of the first bottom. After the stock makes its second bottom, undercutting the first, watch how the stock acts once it's 3 points above the first bottom. If it rises in strong volume at that level, you can go ahead and buy right then and there. • There are three different methods used to calculate the buy point on a shakeout plus 3. • Newest Method. For stocks priced from $20-$30, add about $3 to the first leg down. For stocks priced above $30 add +10% to +14% to the first down leg. • Newer Method. For stocks priced from $20-$60, add about $3 to the first leg down. For stocks priced above $60 add +10% to +14% to the first down leg. • Original Method for stocks priced from $30 - $60, add about $3 to the first leg down. For Stocks priced $60 - $120 add about $6, to the first leg down.
Chart School and Pattern Recognition - Shakeout plus 3 • Two Schematics for Shakeout Plus 3.
Chart School and Pattern Recognition - Shakeout plus 3 Weekly 22.00+$3.00 = 25.00
Chart School and Pattern Recognition - Shakeout plus 3 Daily 22.00+$3.00 = 25.00
Chart School and Pattern Recognition - Shakeout plus 3 Weekly
