 | We look for specific chart patterns with proportion. Patterns include: | | | | | | | | | | | | | | Base on top of Base or Step Pattern | | | | Riding the 50-day Moving Average (M.A.) | | | | Wedge Formation with Breakout (Image Below) | | | | |  | | | Click to see larger View | |
| | Defined Trends | | | We start by looking for charts that are in defined trends. A chart that is heading higher with support lines (50-day Moving Average and 200-day Moving Average) pointing north. The chart must be stable without a lot of volatility. Smooth, slow forming charts tend to give the greatest returns over longer periods of time. | | | | | |  | | | Click to see larger View | |
| | Volume | | | Volume is the biggest clue to show accumulation or distribution within a particular stock. | | | | | As the price rises, we look for above average volume (the larger the better). | | | | We feel comfortable buying when volume continues to rise over a period of time. | | | | Use weekly charts to determine increases in volume. Institutions don’t buy at once; they spread their buys and sells over several days or weeks. | | | | Use daily charts to locate the proper pivot point and buy points. | | | | Look for above average volume as a stock slices through key support lines (50-day M.A.). | | | | Never buy or sell without volume confirmation. | | | | If a stock’s price declines less than 1% on the daily chart but volume is very massive, this may be a clue that support is jumping in to keep the price above certain levels. Look to see if the stock is treading above a major support line. This situation would not count as a distribution day even though the stock showed a loss for the day. | | | | Example of above average volume: XYZ has an average daily volume of 300,000 shares. Suddenly, the stock sees increases in price while it’s volume is now topping 1,000,000 shares per day. This would be a clue that institutions may be jumping aboard or that insiders know something positive. If XYZ is selling at $20 and the stock jumps to $24 and the volume comes in at 4,000,000 shares, this would be very positive. Increases in volume and share price happen for reasons, supply vs. demand is the underlying factor to all movements in a stock. | | | | |  | | | Click to see larger View | |
| | Up Weeks vs. Down Weeks | | | On the weekly charts, look for more up-weeks than down weeks in a basing pattern. Make sure that the volume is higher during the up-weeks than the down weeks. Look for volume to be below average during the down-weeks. As long as the volume is lower than the previous week during down weeks, this can be considered healthy action. | | | | | |  | | | Click to see larger View | |
| | Flat Base | | | A basing stock that has weekly closes within a few percentage points of each other on below average volume. A flat base must last at least 7 weeks in duration. Our research shows better success with flat bases lasting 12 weeks or longer. The pivot point will come on huge volume as the stock breaks out of the tight flat base range. | | | | | |  | | | Click to see larger View | |
| | Gap-Ups | | | This is when a stock opens the day higher than the previous day’s highest selling point. Gap-ups usually happen on above average volume. This shows high interest in a particular stock. | | | | | |  | | | Click to see larger View | |
| | Gap-Downs | | | The opposite of Gap-ups. A major red flag and a sign to sell this stock. Gap downs usually show institutions and “smart money” bailing by selling quickly. Don’t get crushed by the train, jump aboard and sell if you feel uncomfortable. | | | | | |  | | | Click to see larger View | |
| | Cup-with-Handle | | | Look for relatively quiet volume as the stock build the left side of the cup. Volume at the base of the cup should be slightly higher than the left side as support is coming into the stock. The right side of the base should have above average volume with more up-days than down days. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. Our pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume. | | | | | |  | | | Click to see larger View | |
| | Riding the 50-Day Moving Average | | | Stocks that ride the 50-day M.A. without slicing this support line offer great buying opportunities. Look for a stock to retreat to this line in below average volume. Stocks that bounce off of this support line in above average volume show strength in going higher. Institutions use both the 50-day M.A. and 200-day M.A. to place new buys. | | | | | |  | | | Click to see larger View | |
| | Strong Relative Strength(RS) Line | | | Strong stocks showing Relative Strength lines breaking into new high territory are solid candidates to consider. This is always a sign of strength versus the general market conditions. A stock that holds a high RS line during bear markets will have a higher probability of breaking out when conditions turn for the better. | | | | | |  | | | Click to see larger View | |
| | Late Stage Bases | | | Stocks tend to make 3-5 bases during a long run over a few years. Be careful with stocks making late stage bases, they are more vulnerable to failure as most of the “smart money” (institutions) have rotated their cash into new stocks. | | | | | |  | | | Click to see larger View | |
| | False Breakouts | | | If a stock breaks out from a base on above average volume but suddenly reverses course that same day or a few days later, sell out. Don’t wait to get crushed, sell out and wait to see what direction this stock is going to take. Sudden buying and selling shows an undecided stock with supply and demand struggles. When the battle is over, the direction will be clear and confirmed with volume, this is when you can take a new position if the stock is going higher. | | | | | |  | | | Click to see larger View | |
| | Price Reversal | | | Look out for stocks trying to make news highs on above average volume but fail to end the day in the upper half of it’s daily range. This may be a reversal and a possible red flag. If your stock has been in a solid up-trend for several months, making new highs each week or month and then suddenly struggles to make a new high, be careful. Look for other sell signals. | | | | | |  | | | Click to see larger View | |
| | Basic Accumulation and Distribution | | | Accumulation is defined as a price increase with volume larger than the previous day, even if it is below average. If the volume is above average, count this as a stronger sign of accumulation. Distribution is defined as a price decrease with volume larger than the previous day, even if it is below average. If the volume is above average, count this as a stronger sign of distribution. | | | | | |  | | | Click to see larger View | |
| | Corrections | | | All stocks that run up considerably over a length of time will eventually correct and form a second base. As long as the stock is forming a healthy base, you can sit tight and look for a new breakout and possibly add more shares (averaging up). Stocks will correct in proportion to their prior run-up. If a stock gained 100% during the past 8 months, expect it to correct anywhere from 10%-35%. If a stock gained 500% over the past 12 months, expect it to correct anywhere from 25% to 50% while building it’s new base. These are just hypothetical examples, but show the moral of the example, use judgment when analyzing corrections into a second or third stage base. | | | | | |  | | | Click to see larger View | |
| | Saucer with Handle | | | Look for relatively quiet volume as the stock builds the left side of the saucer. A saucer looks similiar to the cup-with-handle but the dip from the high to the low is smaller and usually longer in duration. Volume at the base of the saucer should be slightly higher than the left side as support is coming into the stock. At this point, the base may almost qualify as a flat base. The right side of the base should have above average volume with more up-days than down days but this does not have to be as prominent as the cup-with-handle. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. Our pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume. | | | | | |  | | | Click to see larger View | |
| | | | | Point & Figure (P&F) charts are constructed of columns of X(s) and O(s) that represent price movements over time. Their unique appearance may scare away many investors, especially novice investors but don’t turn away so fast. The power of these charts combined with traditional candlestick and/or bar charts can be very useful. I first learned about these charts from my father when I was a teenager in high school. They have been around for over 100 years as their popularity maintained its strength based on the ease of drawing multiple charts by hand every day with simple paper and pencil. P&F charts do not show time in a linear fashion. The columns filled with X(s) represent increasing prices while the columns with O(s) represent decreasing prices. Each column can represent one day, or many days, depending on the price movement. Because P&F charts filter out the noise associated with more traditional charting methods, every mark on the chart is significant. It does not matter if a breakout or breakdown happens in one day or one year, the significance is the same when dealing with P&F charts. P&F charts offer several advantages over the traditional charts: - They pinpoint support and resistance lines
- They eliminate minor or insignificant price movements that don’t qualify for new X’s and O’s
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