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 trend.

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 Handle pattern.

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 patterns:

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 recognize:

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 failure.

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 charts.

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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