This is one of the most common trading patterns that begins after a stock makes
at least a prior up trend of 30%. That's the first thing to look for on a chart.
Your first sign that this stock has shown at least some power in 30% or more
growth in its price.
The next typical trading activity is to see the stock's price pull back, where
in effect it is taking a break. This is where you'll see a base forming on the
chart, or what we call a consolidation pattern. That holding pattern is key,
since it's the area that weeds out the less committed stockholders and provides
a launch pad for the stock to perhaps move up in price. Any stock requires
support of strong buyers to make major price moves.
You will find that the entire base pattern should last at least 7 weeks and can
be as long as a year and a half. The stock will usually not correct more than
30%, but many historical patterns have corrected as much as 50% in a severe bear
market. Much of chart reading is common sense. In strong markets, you'll see
stronger patterns, given three-fourths of all stocks follow the general market
So, once you've identified this basing pattern, then you'll want to go through
each week and look at the action. Again, you'll understand and see more clearly
by linking to the above-mentioned areas for the specific signs of this Cup with
To help remember the elements of a base, it may help you to make a checklist
that you can use to search for stocks showing this emerging strength in their
Is there a prior up trend of at least 30%?
What type of base is it?
Is the base long enough?
Are there signs of strength and support in the base?
Where is your precise buy point?
Is there a breakout on heavy volume?
Daily vs. Weekly Charts:
I would also add that it's a good idea to consult both daily and weekly
charts since both offer important perspectives in trading patterns. You'll see
the more immediate action in dailies, and they are critical if you want to buy
stocks at their exact pivot, or buy point - and you will also be able to spot
signs of a stock topping and turning down.
You will also see the more long-term formations by viewing weekly price and
volume patterns, and it's a good idea to get in the habit of consulting both.
Buy Stocks Making New Price Highs:
One of the key concepts we cover about proper buy points is buying stocks making
new price highs. Yet, we know that searching out stocks making new highs sounds
disconcerting to many investors - and is a tough concept to accept. After all,
aren't we taught that we should always try and buy cheap and hunt for bargains?
Yet, historical studies continue to show us it's a major trap. The facts show us
the reality is that stocks making new price highs tend to go higher; whereas
stocks making new lows tend to go lower. If you don't believe this, just ask
yourself, how does a stock get all the way to $100 from $50? It goes through $51
and 52 and 53 and so on, each time making a new high in price. But everyone
would agree that $50 is quite a bargain when the stock ends up going up to $100,
right? It turns out that what most people think of as high is really low! That's
the way the market works, to make fools of the majority.
There are few other chart patterns that are equally valuable to learn to
The double bottom, that actually forms the shape of a "W" What's happening is
that in this case, the stock makes a bottom, rallies up and then makes another
bottom that undercuts the first. The key to success for this pattern is the
shakeout of the weaker holders that occurs at the second bottom. The precise buy
point of this pattern is established at the middle of the "W" and it should be
below the old high made at the beginning of the pattern or it is more prone to
And another great base to search out is the flat base.
This is often a second
stage base off of a previous cup with handle or other initial base.
The Ascending Base is the last pattern, which we don't see as often.
These chart patterns will help guide you towards the stocks with the best
potential. Chart reading is not conjecture, but about searching out the same
time-tested patterns of prior successful trading behavior, as we mentioned
earlier. If you can train your eye to spot these critical patterns and key
junctures - where stocks have built strength and are poised to further prove
themselves - then you've conquered half of the investing challenge by timing
your buys. This is a 'skill thing' like practicing tennis or golf, but
absolutely necessary to your success. You would not fly an airplane without an
instrument panel, nor should you fly in your investing without consulting
I want to end by saying that buying is only half of the equation. When I was
just starting out, I used pretty much the same buy rules that I just shared with
you and I saw my stocks produce great returns. The only problem was sometimes I
found myself not participating in those moves because I sometimes took a quick
4-point gain when I could have had a 90-point gain or more. Or, I waited too
long and watched in disbelief as some of my big winners went back down and I
finally ended up selling them right back where I bought them. I got so
frustrated that I started working on building up my sell rules and I'll share
those with you in the next few Web casts on using charts to time your selling
decisions. In the meantime, study those chart patterns and you'll begin to see
improvement in your timing. Good luck!
* This article has been brought to you by William J. O'Neil, Chairman and Founder
of Investor's Business Daily, courtesy of Ameritrade.
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Stocks to Watch: Jos. A. Bank, Kroger are stocks to watch
Among the companies whose shares are expected to see active trade in Thursday?s session are Jos. A. Bank, Dollar General, and Kroger.
Stocks to Watch: J.C. Penney, OmniVision, Express are stocks to watch
Among the companies whose shares are expected to see active trade in Wednesday?s session are J.C. Penney, OmniVision Technologies, and Express.
Stocks to Watch: Ford, General Motors are Tuesday?s stocks to watch
Shares of Ford and General Motors are expected to see active trade in Tuesday?s session with the major auto makers scheduled to report U.S. sales.
Stocks to Watch: EBay, Amazon are stocks to watch Monday
EBay and Amazon.com are expected to be in focus on Monday which has been dubbed ?Cyber Monday? in reference to competitive prices offered by online retailers as the holiday shopping season gets underway.
Stocks to Watch: Wal-Mart, J.C. Penney are ?Black Friday? hot stocks
Big-box retailers such as Wal-Mart Stores Inc. and J.C. Penney Co. are likely to take the spotlight during a holiday-shortened trading session on what?s known as ?Black Friday.?
Stocks to Watch: H-P, Infoblox among stocks to watch Wednesday
Hewlett-Packard is among the stocks to watch Wednesday, after the technology and software provider reported fourth-quarter results that topped Wall Street?s expectations. Infoblox may also see active trading after its shares suffered a steep drop Tuesday evening in the wake of its quarterly results and financial outlook.
Stocks to Watch: H-P, Barnes & Noble among stocks to watch Tuesday
Shares of Hewlett-Packard Co., Barnes & Noble and Tiffany & Co. are expected to see active trading on Tuesday, with the companies scheduled to report quarterly results.
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