How to Make Money in Stocks Trilogy

© 2009 Investor’s Business Daily, Inc.
1,660,000
580,000
340,000
200,000
980,000
Volume
Price
3.0
2.6
4.0
3.4
2.2
50
40
34
60
Dec 2004
Sep 2004
Jun 2004
S&P 500
Mar 2004
Dec 2003
keout
t t
Big volume
Big volume
e
Big volume
m
ke
e
Shak
Sep 2003
Deckers Outdoor increased 766% in 88 weeks.
o
h
Jun 2003
Mar 2003
Market correction 30 Market correction n n c r 26 22 19 16 14 week f 10-week k e 10- Add: off f 1 Add: off 1 o d ge ng average r g a ing moving n n m 12 Earnings acceleration Earnings acceleration n n i e on volume o n line o ne o 10 Buy B 8 7 Buy B 6
Dec 2002
Jun 2002 Sep 2002
Mar 2002
Dec 2001
Sep 2001 Jun 2001
Deckers Outdoor–2003 Weekly Chart Mar 2001 Dec 2000
Price = 20*eps 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.23 0.20 0.18 0.16 0.15 0.14 0.13 0.12 0.11 0.10 Sep 2000

America’s Greatest Stock-Picking Secrets 97





Price 60 50 40 34 30 26 22 19 16 14 12 10 8 7 6 5 4.0 3.4 3.0 2.6 2.2 Volume 1,660,000 980,000 580,000 340,000 200,000 © 2009 Investor’s Business Daily, Inc.



Dec 2004

Sep 2004

week f 10-week k e ge r Jun 2004

S&P 500 10- Add: off f 1 Add: off 1 o d ng average g a ing moving n n m e on volume o n line o ne o Mar 2004


keout e ke e m
t t Dec 2003
Shak h Big volume Big volume Big volume o Sep 2003
Buy B
Jun 2003

Buy B Mar 2003
n
Market correction Market correction c r Earnings acceleration Earnings acceleration i Dec 2002 Deckers Outdoor increased 766% in 88 weeks.
n
n
n


Jun 2002 Sep 2002

Mar 2002

Dec 2001

Sep 2001 Jun 2001

Deckers Outdoor–2003 Weekly Chart Mar 2001 Dec 2000










Price = 20*eps 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.23 0.20 0.18 0.16 0.15 0.14 0.13 0.12 0.11 0.10 Sep 2000

98
A WINNING SYSTEM
12,000,000
25,000,000
3,000,000
6,000,000
Volume
Price
108
3.7
1.5
2.6
3.1
1.8
2.2
4.4
1.3
24
12
17
14
20
10
78
92
56
66
34
29
47
40
6
5
8
7
3/1
Key: volume
Key: volume
e
u
Add
Add
corrects
ups
dry-ups
t
Ad
v
d
Add
Add
when
n
u
e
dry
ry
A
h
o
e
Buy
Bu
Volume up
Buy
p
Volume dry-up
yup
Bu
e
3 high tight flag
g
lume dry
a
Buy
Buy
Vo
u
t
Vo u
t
S&P 500
bases
V
e
g
Big cup-with-handle base
Big cup-with-handle base
ba
a
e
a
h
w
u
Mar 2002 Jun 2004 Mar 2004 Dec 2003 Sep 2003 Jun 2003 Mar 2003 Dec 2002 Sep 2002 Jun 2002 © 2009 Investor’s Business Daily, Inc. T A S E R International increased 2228% in 39 weeks.
Dec 2001
ly l tid y ny ny n h o ly ly n m h o % 2 2 Sep 2001
Characteristics of a high tight flag: Characteristics of a high tight flag: h s 1. A rare pattern usually seen only once or A rare pattern usually seen only once or y e A 1 twice during a bull market year. r r k a c 2. Usually a little known company, not widel n k littl t l
y
g
T A S E R Intl.–2003 Weekly Chart Sep 2000 Jun 2000 Mar 2000
Price = 20*eps 4.50 4.10 3.70 3.40 3.10 2.80 2.50 2.30 2.10 1.90 1.75 1.60 1.45 1.30 1.20 1.10 0.97 0.90 0.82 0.75 0.68 0.61 0.56 0.51 0.47 0.43 0.36 0.30 0.27 0.25 0.23 0.20 0.19 0.17 0.16

98 A WINNING SYSTEM





Price 108 92 78 66 56 47 40 34 29 24 20 17 14 12 10 8 7 6 5 4.4 3.7 3.1 2.6 2.2 1.8 1.5 1.3 Volume 25,000,000 12,000,000 6,000,000 3,000,000 © 2009 Investor’s Business Daily, Inc.
Jun 2004




Add Add Ad Key: volume e Key: volume u v ups 3/1 t Mar 2004
Add Add d A e dry-ups u dry ry n when h corrects e o Dec 2003
Buy Bu
Buy Bu e p Sep 2003
g a t Buy Buy u Volume up Vo yup Volume dry-up lume dry Jun 2003

S&P 500 3 high tight flag t g bases e ba a e Vo u V Mar 2003
Big cup-with-handle base Big cup-with-handle base a h w u Dec 2002







Jun 2002 Sep 2002

Mar 2002 T A S E R International increased 2228% in 39 weeks.

Dec 2001
ly l tid y ny ny n h o ly ly n m h o % 2 2 Sep 2001


Characteristics of a high tight flag: Characteristics of a high tight flag: h s 1. A rare pattern usually seen only once or A rare pattern usually seen only once or y e A 1 twice during a bull market year. r r k a c 2. Usually a little known company, not widel n k littl t l
y
g






T A S E R Intl.–2003 Weekly Chart Sep 2000 Jun 2000 Mar 2000









Price = 20*eps 4.50 4.10 3.70 3.40 3.10 2.80 2.50 2.30 2.10 1.90 1.75 1.60 1.45 1.30 1.20 1.10 0.97 0.90 0.82 0.75 0.68 0.61 0.56 0.51 0.47 0.43 0.36 0.30 0.27 0.25 0.23 0.20 0.19 0.17 0.16

America’s Greatest Stock-Picking Secrets 99
40,000,000
140,000,000
80,000,000
20,000,000
Volume
Price
260
100
120
140
190
160
220
20
15
17
38
60
70
13
80
45
28
11
24
32
9
Sell stock
k
t
Sll l l
S
S
n
e
base in 1898 on page 11, Brunswick in 1960 on page
e
highs on low volume
Brunswick in 1960 on page
highs on low volume
r
g
e
31, Liz Claiborne in 1982 on page 69 and Wal-Marti
1980 on page 62. History repeats itself over and ove
m
again in the stock market. Learn to recognize these
Now you can see how similar Apple’s March, 2004
ase is to Tennessee Coal & Iron’s
cup-with-handle base is to Tennessee Coal & Iron’s
t recognize these
Do Not Buy! New
w
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l
o
0
d
o
M
a
w
Wa
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patterns and you’ll find next year’s winner.
l l
v
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9
a
M
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a
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c
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6
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market. Learn to
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a
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a
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p
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T
T
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T
a
T
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e
y
t
age 11
y
Buy
y
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9
w
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e
e
again in the stock m
m
H
n
handle ba
a
a
base in 1898 on pa
h
l
e
n
o
6
n
e
S&P 500
g
b
d
a
a
9
t
1
h
C
u
with
y
w
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i
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Add
Add
cup
o
9
a
g
1
a
u
A
Buy
u
Mar 2006 © 2009 Investor’s Business Daily, Inc. Mar 2008 Dec 2007 Sep 2007 Jun 2007 Mar 2007 Dec 2006 Sep 2006 Jun 2006
Add Dec 2005 Apple increased 1418% in 199 weeks.
s
Do Not Buy! 3 weeks w y is not a base and n stock is up 100% Sep 2005
k
N
o
Buy Jun 2005
s 2/1
IPhones, iPods and relentless s , innovations for the masses. r Do Not Buy! This is a 4th stage base t Dec 2004 Sep 2004
s t e T y a Mar 2005
n
Buy: 8-week k week Buy: 8 u base-on-base s a 6 tight weeks 6 tight weeks h h Big volume clue e e Jun 2004
v
Apple–2004 Weekly Chart Buy u Perfect cup- ft ct P with-handle a B in the base n Mar 2004 Dec 2003
Price = 20*eps 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40

America’s Greatest Stock-Picking Secrets 99





Price 260 220 190 160 140 120 100 80 70 60 45 38 32 28 24 20 17 15 13 11 9 Volume 140,000,000 80,000,000 40,000,000 20,000,000 © 2009 Investor’s Business Daily, Inc.

k
Sell stock t Sll l l S S e e n r Mar 2008


Do Not Buy! New w u o o highs on low volume highs on low volume m l o w l l gh hig 0 r M e ase is to Tennessee Coal & Iron’s o a s n Brunswick in 1960 on page g 9 n c s M Wa a 6 pg g e t recognize these d a v l a e e n c n r n a Dec 2007 Sep 2007






Buy y y Now you can see how similar Apple’s March, 2004 A a m w h cup-with-handle base is to Tennessee Coal & Iron’s T T T T T t e a base in 1898 on page 11, Brunswick in 1960 on page r age 11 e a 31, Liz Claiborne in 1982 on page 69 and Wal-Marti 9 n 1980 on
S&P 500 e a u handle ba e a h base in 1898 on pa n 9 1 n b C 6 g again in the stock m t o d Dec 2006


Add Add A y o with w cup u i a i 1 9 g r a Sep 2006
Buy u
Jun 2006

Mar 2006
Add Dec 2005 Apple increased 1418% in 199 weeks.
s
Do Not Buy! 3 weeks w y is not a base and n stock is up 100% Sep 2005


k
o
N
Buy Jun 2005
2/1
s
IPhones, iPods and relentless s , innovations for the masses. r Do Not Buy! This is a 4th stage base t Dec 2004 Sep 2004
s t e T y a Mar 2005



n
v
Buy: 8-week k week Buy: 8 u base-on-base s a 6 tight weeks 6 tight weeks h h Big volume clue e e Jun 2004
Apple–2004 Weekly Chart Buy u Perfect cup- ft ct P with-handle a B in the base n Mar 2004 Dec 2003





Price = 20*eps 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40

100
A WINNING SYSTEM
Price
26
30
40
22
50
34
60
16
14
19
ck closes gap
S&P 500
s
s
up 8 weeks in a row
p 8 weeks in a row
a and stock goes
and stock goes
a
s
k
c
s
i
Pullback c
ack c
e
k
k
ea an
Do Not Buy!
Do Not Buy!
w
y
y
area a
a
area
up 8
u
p
p
up
p
x top
climax top
N
o
D
Sell:
Sell:
e
i
correction
correction
o
Market
k
r
Buy: big volume
e
m
M
c
l
o
on gap up
on gap up
big
g
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o
B
B
n
Market correction
o
e
Note: tiny spreads for 4 weeks 12 e n e e e eonbase e-on-base b Base-o o se-o Base s B 10 and then 2 weeks (sound bases and then 2 weeks (sound bases a n Buy B need a few weeks with small l w e ) price variation) ) r 8 d: rebound off bound off o n d: rebo
ck in g ki B 2 22 4 e So you understand e p p Jun 2003 Mar 2003 Dec 2002
base patterns like
tt
Southwestern Energy–2004 Weekly Chart Now you’ve seen several base-on-base patterns like n on Now you ve seen several base r s this one. Compare it to IBM in 1927 on page 19, 9 m Minneapolis Honeywell in 1934 on page 22, Brunswi i 1934 o ll i l H H li 1958 on page 31, National Airlines in
Price = 20*eps 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 w 0.80 0.75 s 0.70 Min 0.65 5 0.60 0.55 m 0.50 a 0.45 0.40 0.35 0.30 0.25 0.23 0.20 0.18 0.16 0.15 0.14 0.13 0.12 0.

100 A WINNING SYSTEM





Price 60 50 40 34 30 26 22 19 16 14 12 10 8 7 6 5 4.0 3.4 3.0 2.6 2.2 1.9 Volume 20,000,000 11,000,000 6,000,000 3,000,000 © 2009 Investor’s Business Daily, Inc.

S&P 500 ck closes gap s s s s and stock goes a and stock goes k c up 8 weeks in a row p 8 weeks in a row a i Low volume Low volume v w breakout k e Mar 2006


Do Not Buy! Do Not Buy! y y N x top o ack c Pullback c k k u ea an a area a area e w up 8 p p up p s 3 weeks e huge selling g huge selling huge selling g g e 2/1 Dec 2005

D
Sell: Sell: e climax top i 3 h Sep 2005
2/1 Jun 2005
o
Market k M correction correction r c e m e e e eonbase e-on-base b o o k e - e g m l
Buy: big volume l o big y on gap up on gap up g Base-o se-o Base s B d: rebound off bound off n d: rebo pullback to 10-week b moving average line a i with higher volume with higher volume h Mar 2005

Add:
dd:
Add
o
d
B
B
pu
pu
pu
m
A
w
p Dec 2004
Tight area Tight area r Volume up u Sep 2004
Market correction e Buy B 24-week cup- k cup eek k 24 with-handle n Jun 2004 Mar 2004
n o gh T
Note: tiny spreads for 4 weeks e n and then 2 weeks (sound bases and then 2 weeks (sound bases a n need a few weeks with small l w e ) price variation) ) r Dec 2003 Sep 2003 Southwestern Energy increased 556% in 83 weeks.



ck in g ki B 2 22 4 e So you understand e p p Jun 2003 Mar 2003 Dec 2002
base patterns like

Southwestern Energy–2004 Weekly Chart Now you’ve seen several base-on-base patterns like n on Now you ve seen several base r s this one. Compare it to IBM in 1927 on page 19, 9 m Minneapolis Honeywell in 1934 on page 22, Brunswi i 1934 o ll i l H H li 1958 on page 31, National Airlines in
tt












Price = 20*eps 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 w 0.80 0.75 s 0.70 Min 0.65 5 0.60 0.55 m 0.50 a 0.45 0.40 0.35 0.30 0.25 0.23 0.20 0.18 0.16 0.15 0.14 0.13 0.12 0.

© 2009 Investor’s Business Daily, Inc.
12,000,000
7,000,000
4,000,000
2,000,000
Volume
Price
4.0
3.0
3.4
34
40
30
22
26
50
80
60
70
5
6
Sep 2007
Jun 2007
Mar 2007
S&P 500
Dec 2006
Sep 2006
Jun 2006
C B Richard Ellis Group increased 538% in 149 weeks.
3/1
Mar 2006
Sell
Sell
Se
2
2
S
Dec 2005
1
1
correction
Buy
y
Buy
Add: off 10-week line
e
Market
Market
B
Sep 2005
B
-
Jun 2005
y 19 Buy 16 14 12 10 15-week base e 8 7 America’s Greatest Stock-Picking Secrets 101
n B B -wee w d
Market Market M correction a Mar 2005
Tight closes c oses s g in a flat base Dec 2004
c
Sep 2004
Buy
n ti B
Market correction O Jun 2004
Recent IPO t Earnings acceleration Earnings acceleration i Mar 2004
C B Richard Ellis–2004 Weekly Chart Dec 2003 Sep 2003 Jun 2003
Price = 20*eps 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.23 0.20 0.18 0.16 0.15

America’s Greatest Stock-Picking Secrets 101





Price 80 70 60 50 40 34 30 26 22 19 16 14 12 10 8 7 6 5 4.0 3.4 3.0 Volume 12,000,000 7,000,000 4,000,000 2,000,000 © 2009 Investor’s Business Daily, Inc.

Sep 2007

Jun 2007

Mar 2007
S&P 500 Dec 2006


Sep 2006

Jun 2006
3/1
Mar 2006
Sell Sell Se S 2 2
Dec 2005
1 y 1
Market Market correction Buy Buy B B e Add: off 10-week line - Sep 2005



y Buy 15-week base e Jun 2005 C B Richard Ellis Group increased 538% in 149 weeks.
n B B -wee w d
Market Market M correction c s a Mar 2005
Tight closes c oses g in a flat base Dec 2004


Sep 2004
Buy
n B
Market correction ti O Jun 2004
Recent IPO t Earnings acceleration Earnings acceleration i Mar 2004


C B Richard Ellis–2004 Weekly Chart Dec 2003 Sep 2003 Jun 2003










Price = 20*eps 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.23 0.20 0.18 0.16 0.15

102
A WINNING SYSTEM
Price
1200
1000
700
800
S&P 500
Do Not Buy! o t clo p 2 12
! 600 500 400 s s Earnings deceleration begins Earnings deceleration begins n e n a l n E 340 300 Wedging up along g p gg u W 260 price lows p 220 190 closes and d n 160 points points 140 120 100 80 70 60 50 Volume 16,000,000 8,000,000 4,000,000 2,000
o so m Add 3 weeks tight clo w 3 shakeout + 12 shakeout + 12 a osing in i g losin i d d week and h week and k h w lume which h lume without ume without h p s s Sep 2005
Whole new revolutionary concept in its industrys Whole new revolutionary concept in its industry s t y e it dominates in the space for instant information. a c p i o Do Not Buy! 2 largest t !2l tB N e volume weeks in base volume weeks in base k l are down weeks e e Buy Buy y Buy B









Google–2004 Weekly Chart Do Volume dry-up y o on price pullback on price pullback n Jun 2004 Mar 2004 Dec 2003





Price = 20*eps 70 65 60 55 50 45 40 35 30 25 22 20 18 16 15 14 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

102 A WINNING SYSTEM





Price 1200 1000 800 700 600 500 400 340 300 260 220 190 160 140 120 100 80 70 60 50 Volume 16,000,000 8,000,000 4,000,000 2,000,000 © 2009 Investor’s Business Daily, Inc.

Mar 2008

Earnings deceleration begins Earnings deceleration begins n a l Sep 2007
s s n e Dec 2007






S&P 500 n E Jun 2007 Mar 2007


Dec 2006
Sep 2006


Wedging up along p gg u price lows Jun 2006 Mar 2006
g



! W p closes and d n points points Dec 2005 Google increased 536% in 164 weeks.
Do Not Buy! o t clo p 2 12
o so m Add 3 weeks tight clo w 3 shakeout + 12 shakeout + 12 a osing in i g losin i d d week and h week and k h w lume which h lume without ume without h p s s Sep 2005
Whole new revolutionary concept in its industrys Whole new revolutionary concept in its industry s t y e it dominates in the space for instant information. a c p i o Do Not Buy! 2 largest t !2l tB N e volume weeks in base volume weeks in base k l are down weeks e Buy Buy y Buy B 2














Google–2004 Weekly Chart Do e Volume dry-up y o on price pullback on price pullback n Jun 2004 Mar 2004 Dec 2003






Price = 20*eps 70 65 60 55 50 45 40 35 30 25 22 20 18 16 15 14 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

America’s Greatest Stock-Picking Secrets 103
16,000,000
2,000,000
4,000,000
8,000,000
Volume
Price
1.1
1.4
0.9
1.6
3.6
2.3
4.6
2.7
2.0
36
23
27
11
13
16
19
7
6
9
4/1
Sell: climax top
o
4 of 6 weeks
s
a
close closes
S&P 500
e
s
i
c
:
Volume up
p
Volume up
olume up
o
o
u
weeks tight
3 weeks tight
Market correction
gh
n
n
m
t
s t
s
Shakeout; holds
out; holds
s
at 10-week line
n
Buy
e
3ee
r
o
u
2/1
3 w
k
3
3
w
o
Shakeo
r
M
a
1
S
S
S
S
a
Add
d
A
Volume up
p
olume up
e
e
e
cup-with-handl
handl
Market correction
n
y
y
t
Buy
with
20-week
-we
up
cu
cu
k
c
c
2
c
Jun 2004 Sep 2006 Jun 2006 Mar 2006 Dec 2005 Sep 2005 Jun 2005 Mar 2005 Dec 2004 Sep 2004 © 2009 Investor’s Business Daily, Inc. Hansen Natural increased 1219% in 86 weeks.
Mar 2004
Dec 2003
Sep 2003
Jun 2003
Mar 2003 Dec 2002
Hansen Natural–2004 Weekly Chart Sep 2002 Jun 2002
Price = 20*eps 2.05 1.80 1.45 1.35 1.25 1.15 1.05 0.93 0.82 0.72 0.68 0.63 0.57 0.51 0.46 0.41 0.36 0.31 0.26 0.23 0.20 0.18 0.15 0.14 0.13 0.11 0.11 0.09 0.08 0.07 0.07 0.06 0.06 0.05 0.05

America’s Greatest Stock-Picking Secrets 103





Price 36 27 23 19 16 13 11 9 7 6 4.6 3.6 2.7 2.3 2.0 1.6 1.4 1.1 0.9 Volume 16,000,000 8,000,000 4,000,000 2,000,000 © 2009 Investor’s Business Daily, Inc.

Sep 2006
4/1
Jun 2006
Sell: climax top a i s e s Mar 2006
o
S&P 500 n n : 4 of 6 weeks o close closes c o gh Volume up Volume up olume up p u m Dec 2005

Market correction t r r M Buy u 3 weeks tight weeks tight s t e 3ee 3 w 3 3 out; holds Shakeout; holds s s o o at 10-week line n k w 2/1 Sep 2005


Shakeo
a
1
S
S
S
S
a
Add A Mar 2005
d Jun 2005
olume up p Volume up e
e e Dec 2004
n t y y handl
Market correction k Buy 20-week -we 2 cup-with-handl with up cu cu c c c Sep 2004
Jun 2004 Hansen Natural increased 1219% in 86 weeks.
Mar 2004

Dec 2003

Sep 2003

Jun 2003

Mar 2003 Dec 2002
Hansen Natural–2004 Weekly Chart Sep 2002 Jun 2002










Price = 20*eps 2.05 1.80 1.45 1.35 1.25 1.15 1.05 0.93 0.82 0.72 0.68 0.63 0.57 0.51 0.46 0.41 0.36 0.31 0.26 0.23 0.20 0.18 0.15 0.14 0.13 0.11 0.11 0.09 0.08 0.07 0.07 0.06 0.06 0.05 0.05

104
A WINNING SYSTEM
16,000,000
30,000,000
4,000,000
2,000,000
8,000,000
Volume
Price
2.5
2.1
2.9
4.6
3.6
1.8
1.0
0.8
1.5
1.3
19
23
16
11
13
36
27
9
6
7
2/1
k
k
eek
eek
e line
e
ee
ecovery off 10-wee
e
Sell: climax top
moving average lin
we
e lin
: first volume
first volume
ecovery off 10-
2/1
Sell: clima
clima
u
1
a
m
v
o
v
Sell: : c
S&P 500
e
i
e
n
Add: f
d: f
Add:
o
rec
ec
c
m
re
A
2/1
p
Volume up
-week cup-
Market correction
n
n
-
m
dle
with-handle
u
ti
t
with-hand
-week
12-week
o
k
k
r
Buy
Buy
w
t c
u
h
wit
wit
w
w
w
1
k
Mk
M
Big volume on
Big volume on
o
prior uptrend
prior uptrend
d
tion
m
Earnings accelerat t
u
e
o
c
pr
B
5/1
a
Jun 2004 Jun 2006 Mar 2006 Dec 2005 Sep 2005 Jun 2005 Mar 2005 Dec 2004 Sep 2004 © 2009 Investor’s Business Daily, Inc. Titanium Metals increased 764% in 49 weeks.
Mar 2004
Dec 2003
Sep 2003
Jun 2003
Mar 2003 Dec 2002
1/10
Titanium Metals–2005 Weekly Chart Sep 2002 Jun 2002 Mar 2002
Price = 20*eps 1.80 1.45 1.35 1.25 1.15 1.05 0.93 0.82 0.72 0.68 0.63 0.57 0.51 0.46 0.41 0.36 0.31 0.26 0.23 0.20 0.18 0.15 0.14 0.13 0.11 0.11 0.09 0.08 0.07 0.07 0.06 0.06 0.05 0.05 0.04

104 A WINNING SYSTEM





Price 36 27 23 19 16 13 11 9 7 6 4.6 3.6 2.9 2.5 2.1 1.8 1.5 1.3 1.0 0.8 Volume 30,000,000 16,000,000 8,000,000 4,000,000 2,000,000 © 2009 Investor’s Business Daily, Inc.



2/1 Jun 2006
eek
eek
k
k
e
e
ee
Sell: climax top Sell: clima clima m : first volume first volume u v ecovery off 10-wee we 1 o e line e lin moving average lin a v 2/1 Mar 2006
S&P 500 Sell: : c e i d: f Add: f Add: ecovery off 10- e ec rec c n o Dec 2005
m
re
A
2/1
p Volume up m Sep 2005
n
Market correction ti t r t c Mk k Buy Buy u -week cup- -week k k 12-week w 1 dle with-handle with-hand h wit wit w w w o Jun 2005 Mar 2005
n
-
u
M
tion e Big volume on Big volume on o m o d prior uptrend prior uptrend u Dec 2004
Earnings accelerat t c 5/1 B pr Sep 2004
a
Jun 2004 Titanium Metals increased 764% in 49 weeks.
Mar 2004

Dec 2003

Sep 2003

Jun 2003

Mar 2003 Dec 2002
1/10

Titanium Metals–2005 Weekly Chart Sep 2002 Jun 2002 Mar 2002










Price = 20*eps 1.80 1.45 1.35 1.25 1.15 1.05 0.93 0.82 0.72 0.68 0.63 0.57 0.51 0.46 0.41 0.36 0.31 0.26 0.23 0.20 0.18 0.15 0.14 0.13 0.11 0.11 0.09 0.08 0.07 0.07 0.06 0.06 0.05 0.05 0.04

America’s Greatest Stock-Picking Secrets 105
5,000,000
8,000,000
3,000,000
1,800,000
Volume
Price
140
120
100
260
190
160
220
26
30
10
12
14
16
22
19
60
50
80
70
34
40
S&P 500
Volume up
u
m
y
Buy
u
o
Volume up
u
Dec 2005 © 2009 Investor’s Business Daily, Inc. Mar 2008 Dec 2007 Sep 2007 Jun 2007 Mar 2007 Dec 2006 Sep 2006 Jun 2006 Mar 2006 Precision Castparts increased 259% in 115 weeks.
s
n o c Volume up e 2/1 Sep 2005
Market correction et Buy 19-week saucer-with-handle a many tiny weekly price spreads many tiny weekly price spreads w V Jun 2005 Mar 2005
Big volume
19-w
19-w
9
9
B g
m
Dec 2004 Sep 2004
Precision Castparts–2005 Weekly Chart Jun 2004 Mar 2004 Dec 2003
Price = 20*eps 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45

America’s Greatest Stock-Picking Secrets 105





Price 260 220 190 160 140 120 100 80 70 60 50 40 34 30 26 22 19 16 14 12 10 Volume 8,000,000 5,000,000 3,000,000 1,800,000 © 2009 Investor’s Business Daily, Inc.
Mar 2008

Dec 2007

Sep 2007

Jun 2007

S&P 500 Mar 2007

Dec 2006
Volume up u m
y Sep 2006
Buy u o
Volume up u Jun 2006
Mar 2006

Dec 2005 Precision Castparts increased 259% in 115 weeks.

s

Market correction et Buy 19-week saucer-with-handle a many tiny weekly price spreads many tiny weekly price spreads w V Jun 2005 Mar 2005
n o c Volume up e 2/1 Sep 2005
Big volume
19-w
19-w
9
9
m
B g
Dec 2004 Sep 2004
Precision Castparts–2005 Weekly Chart Jun 2004 Mar 2004 Dec 2003










Price = 20*eps 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45

106
A WINNING SYSTEM
Price
S&P 500
Market t 340 300 correction c 260 220 s Sell: closes o S 190 below 10-week k k w 10 1 w l b b e e age moving average g e e g a g ov m 160 Buy y Buy B on huge volume e m o e h o 140 120 100 Add Add 80 70 p Wedging up p p Wedging up We We W W W EPS
n n n Buy Buy 15-week cup- p c with-handle d e Huge volume volume m
Market correction 15-w 15-w Jun 2005 Mar 2005


Dec 2004

Sep 2004 Jun 2004


Intuitive Surgical–2005 Weekly Chart Mar 2004 Dec 2003 Sep 2003










Price = 20*eps 16 15 14 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 1/2

106 A WINNING SYSTEM





Price 340 300 260 220 190 160 140 120 100 80 70 60 50 40 34 30 26 22 19 16 14 12 Volume 8,000,000 5,000,000 3,000,000 1,800,000 © 2009 Investor’s Business Daily, Inc.


Dec 2007

Sep 2007

Jun 2007

Buy y Buy B turns up turns up Mar 2007

S&P 500 EPS E t Dec 2006


e k k e age g e m Sep 2006
Sell: closes o S below 10-week 10 1 w l moving average g a g ov m on huge volume e h Jun 2006
s w e e o

Wedging up p p p Wedging up We We W W W along lows o Mar 2006
o
b
b
Market t correction c Add Add - Volume o p up Dec 2005 Sep 2005 Intuitive Surgical increased 418% in 123 weeks.

Market correction 15-w 15-w Jun 2005 Mar 2005
n n n Buy Buy 15-week cup- p c with-handle d e Huge volume volume m




Dec 2004

Sep 2004 Jun 2004


Intuitive Surgical–2005 Weekly Chart Mar 2004 Dec 2003 Sep 2003










Price = 20*eps 16 15 14 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 1/2

© 2009 Investor’s Business Daily, Inc.
5,000,0000
1,800,000
8,000,000
Volume
3,000,00
Price
11
13
17
15
9
Jun 2008
Mar 2008
Dec 2007
+34%, +53%, +107%, to +126%
%
to +126%
2
earnings growth accelerated
Sep 2007
In the March, 2007 quarter,
2007 quarter
r
er
e
+
e
a
+107%
7
Jun 2007
h
0
+
+53%
%
o
n the March
h
g
5
a
Mar 2007
%
n
+34%
e
4
t
r
Priceline.com increased 320% in 85 weeks.
Dec 2006
Sep 2006
Jun 2006
Mar 2006
Precedent for Priceline.com was Redman 260 Precedent for Priceline com was Redman n n R c r Industries from January, 1968 y o S&P 500 220 190 n n Market correction Market correction o 160 Sell: breaks upper r p u a b e 140 channel line channel line i h 120 At buy point: i y
Dec 2005
Sep 2005
e
d
Mar 2005 Jun 2005
Dec 2004 Sep 2004
Priceline.com–2006 Weekly Chart Jun 2004 Mar 2004
Price = 20*eps 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45

America’s Greatest Stock-Picking Secrets 107





Price 260 220 190 160 140 120 100 80 70 60 45 38 32 28 24 20 17 15 13 11 9 Volume 8,000,000 5,000,0000 3,000,00 1,800,000 © 2009 Investor’s Business Daily, Inc.


Jun 2008

Mar 2008

Dec 2007
%
Sell: breaks upper u a b e channel line channel line i h e n 2007 quarter r er a 0 earnings growth accelerated e e h +34%, +53%, +107%, to +126% to +126% + +107% 7 + Sep 2007
r
p
2
Add: off 10-week e w moving average line moving average line moving average line e e r a n In the March, 2007 quarter, h n the March a e t o g n % +53% 5 % +34% 4 Jun 2007 Mar 2007

S&P 500 d o r
Dec 2006

n n Sep 2006
Market correction Market correction o + % 5 h % 15% r hi s Buy B B 15-week cup- w with-handle with-handle - Jun 2006 Mar 2006 Priceline.com increased 320% in 85 weeks.



Precedent for Priceline.com was Redman Precedent for Priceline com was Redman R c r Industries from January, 1968 y o At buy point: i yp Last quarter EPS growth: +34% a Annual average EPS growth rate: +65% Last quarter Sales growth rate: +15% Last quarter Sales growth rate: s a R
n
n







d
e
Mar 2005 Jun 2005
Dec 2004 Sep 2004
Priceline.com–2006 Weekly Chart Jun 2004 Mar 2004









Price = 20*eps 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45

108
A WINNING SYSTEM
Price
300
260
340
400
S&P 500
h
nofurther price progress. Sell next week in 12th week of advance
e
e
Sell: “Railroad tracks” 2 weeks retracing same area, closing in the
e
e
e
closing in the
same upper part but red volume was increased heavy volume wit t
A little too soon to sell for
a climax top, only 7 weeks
n
o
va
e
e
eek of adv
ad
w
a
a
n
u
e
k of
o
o
v
y
k
eek
o
a
o
2 weeks retracing same area
p
h
s
r
h
1
x
m
t
s
m
s
t
r
n
n
e
A
t
r
w
e
r
n
u
e
w
s
r
gr
Railroad tracks”
o
c
p
p
These comments about increased 220 out of base, should be at t should be at b u h out of base b o least 10–12 weeks k e 2 0 t e e u m 190 volume without further price progress s o i the t f h ith l o Buy: 10-week k w 0 y in the current direction tell you the in t
p
e
i
Sell:
w
n
T
Huge quarterly sales Huge quarterly sales s q growth and EPS growth. growth and EPS growth. S h High P/E ratio doesn’t P/ stop stock’s move from f o k’ t t t 20 to 280 2 Jun 2005 Mar 2005 Dec 2004
Sep 2004
Jun 2004
First Solar–2007 Weekly Chart Mar 2004 Dec 2003
Price = 20*eps 20 18 16 15 14 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75

108 A WINNING SYSTEM





Price 400 340 300 260 220 190 160 140 120 100 80 70 60 50 40 34 30 26 22 19 16 Volume 12,000,000 7,000,000 4,000,000 2,000,000 © 2009 Investor’s Business Daily, Inc.


S&P 500 Stock closes up s 45% off low: 45% off low: o o good supporting p p s action compared action compared m to two prior to two prior i weeks that a closed near lows l e d d Mar 2008 Dec 2007



e e closing in the e n n o h e u v a e e va eek of adv ad a a k of eek k A little too soon to sell for o e o o a climax top, only 7 weeks e w y o out of base, should be at t should be at b u h k e Buy: 10-week k w 0 y cup-with-handle handle with- i p cup o
Sell: “Railroad tracks” 2 weeks retracing same area, closing in the 2 weeks retracing same area r m s n r r w Railroad tracks” c same upper part but red volume was increased heavy volume wit t h s r n w e u r nofurther price progress. Sell next week in 12th week of advance h 1 e t n













p
These comments about increased e u m volume without further price progress o i the t f h ith l o in the current direction tell you the in the current direction tell you the t n n results of supply and demand and the n d u direction is about to change. This is a valuable to l
p
e
i
Sell:



e
n
w
T
Huge quarterly sales Huge quarterly sales s q growth and EPS growth. growth and EPS growth. S h High P/E ratio doesn’t P/ stop stock’s move from f o k’ t t t 20 to 280 2 Jun 2005 Mar 2005 Dec 2004




Sep 2004

Jun 2004
First Solar–2007 Weekly Chart Mar 2004 Dec 2003







Price = 20*eps 20 18 16 15 14 13 12 11 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75

America’s Greatest Stock-Picking Secrets 109
16,000,000
8,000,000
2,000,000
4,000,000
Volume
Price
160
140
100
120
190
220
26
50
22
40
34
30
10
19
12
16
14
70
60
80
8
rage line
e
week
week
e
p
e
olume up
volume up
a
ng avera
w
Add off 10-w
aver
with volume
with volume
moving ave
u
a
1
o
o
line and acceleration to
line and acceleration to
t
o
with v
v
v
with v
New high in earnings
o
o
n
t
+126% growth
a
h
e
w
n
c
Volume up
a
h
g
a
6
u
n
Market correction
o
e
n
1
V
e
c
Buy
e
B
M
S&P 500
Jun 2006 © 2009 Investor’s Business Daily, Inc. Sep 2008 Jun 2008 Mar 2008 Dec 2007 Sep 2007 Jun 2007 Mar 2007 Dec 2006 Sep 2006 Mosaic increased 265% in 40 weeks.
Mar 2006
Dec 2005
Sep 2005
Jun 2005
Mar 2005
Dec 2004
Sep 2004
Mosaic–2007 Weekly Chart Jun 2004 Mar 2004
Price = 20*eps 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35

America’s Greatest Stock-Picking Secrets 109





Price 220 190 160 140 120 100 80 70 60 50 40 34 30 26 22 19 16 14 12 10 8 Volume 16,000,000 8,000,000 4,000,000 2,000,000 © 2009 Investor’s Business Daily, Inc.


week week e w rage line e e a aver p volume up olume up Sep 2008 Jun 2008
Add off 10-w 1 o ng avera moving ave a o with volume with volume u v with v v with v t n o o t o
New high in earnings a n h line and acceleration to line and acceleration to e c a a h +126% growth w g 6 Volume up u Mar 2008 Dec 2007




Market correction o e c e M Buy B e n 1 V Sep 2007 Jun 2007
n




S&P 500 Mar 2007

Dec 2006

Sep 2006

Jun 2006 Mosaic increased 265% in 40 weeks.

Mar 2006

Dec 2005

Sep 2005

Jun 2005

Mar 2005

Dec 2004

Sep 2004
Mosaic–2007 Weekly Chart Jun 2004 Mar 2004





Price = 20*eps 10 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.25 2.00 1.80 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35

2







• C HAP T E R •



How to Read Charts

Like a Pro and Improve


Your Selection and Timing








In the world of medicine, X-rays, MRIs, and brain scans are “pictures” that doctors
study to help them diagnose what’s going on in the human body. EKGs and
ultrasound waves are recorded on paper or shown on TV-like monitors to
illustrate what’s happening to the human heart.
Similarly, maps are plotted and set to scale to help people understand
exactly where they are and how to get to where they want to go. And seismic
data are traced on charts to help geologists study which structures or pat-
terns seem most likely to contain oil.
In almost every field, there are tools available to help people evaluate
current conditions correctly and receive accurate information. The same is
true in investing. Economic indicators are plotted on graphs to assist in their
interpretation. A stock’s price and volume history are recorded on charts to
help investors determine whether the stock is strong, healthy, and under
accumulation or whether it’s weak and behaving abnormally.
Would you allow a doctor to open you up and perform heart surgery if he
had not utilized the critical necessary tools? Of course not. That would be
just plain irresponsible. However, many investors do exactly that when they
buy and sell stocks without first consulting stock charts. Just as doctors
would be irresponsible not to use X-rays, CAT scans, and EKGs on their
patients, investors are just plain foolish if they don’t learn to interpret the
price and volume patterns found on stock charts. If nothing else, charts can
tell you when a stock is not acting right and should be sold.
Individual investors can lose a lot of money if they don’t know how to rec-
ognize when a stock tops and starts into a significant correction or if they
have been depending on someone else who also doesn’t know this.


110

How to Read Charts Like a Pro and Improve Your Selection and Timing 111


Chart Reading Basics


A chart records the factual price performance of a stock. Price changes are
the result of daily supply and demand in the largest auction marketplace in
the world. Investors who train themselves to decode price movements on
charts have an enormous advantage over those who either refuse to learn,
just don’t know any better, or are a bit lazy.
Would you fly in a plane without instruments or take a long cross-country
trip in your car without a road map? Charts are your investment road map.
In fact, the distinguished economists Milton and Rose Friedman devoted
the first 28 pages of their excellent book Free to Choose to the power of
market facts and the unique ability of prices to provide important and accu-
rate information to decision makers.
Chart patterns, or “bases,” are simply areas of price correction and con-
solidation after an earlier price advance. Most of them (80% to 90%) are
created and formed as a result of corrections in the general market. The skill
you need to learn in order to analyze these bases is how to diagnose whether
the price and volume movements are normal or abnormal. Do they signal
strength or weakness?
Major advances occur off strong, recognizable price patterns (discussed
later in this chapter). Failures can always be traced to bases that are faulty
or too obvious to the typical investor.
Fortunes are made every year by those who take the time to learn to inter-
pret charts properly. Professionals who don’t make use of charts are confess-
ing their ignorance of highly valuable measurement and timing mechanisms.
To further emphasize this point: I have seen many high-level investment pro-
fessionals ultimately lose their jobs as a result of weak performance.
When this happens, their poor records are often a direct result of not
knowing very much about market action and chart reading. Universities that
teach finance or investment courses and dismiss charts as irrelevant or
unimportant are demonstrating their complete lack of knowledge and
understanding of how the market really works and how the best profession-
als operate.
As an individual investor, you too need to study and benefit from stock
charts. It’s not enough to buy a stock simply because it has good fundamen-
tal characteristics, like strong earnings and sales. In fact, no Investor’s Busi-
®
ness Daily reader should ever buy a stock based solely on IBD’s proprietary
®
SmartSelect Ratings. A stock’s chart must always be checked to determine
whether the stock is in a proper position to buy, or whether it is the stock of
a sound, leading company but is too far extended in price above a solid bas-
ing area and thus should temporarily be avoided.

112 A WINNING SYSTEM


As the number of investors in the market has increased over recent years,
simple price and volume charts have become more readily available.
(Investor’s Business Daily subscribers have free access to 10,000 daily and
weekly charts on the Web at Investors.com.) Chart books and online chart
services can help you follow hundreds and even thousands of stocks in a
highly organized, time-saving way. Some are more advanced than others,
offering both fundamental and technical data in addition to price and volume
movement. Subscribe to one of the better chart services, and you’ll have at
your fingertips valuable information that is not easily available elsewhere.



History Repeats Itself: Learn to Use Historical Precedents
As mentioned in the introduction, and as shown on the annotated charts of
history’s best winners in Chapter 1, our system for selecting winning stocks is
based on how the market actually operates, not on my or anyone else’s per-
sonal opinions or academic theories. We analyzed the greatest winning stocks
of the past and discovered they all had seven common characteristics, which
can be summarized in the two easy-to-remember words CAN SLIM. We also
discovered there were a number of successful price patterns and consolida-
tion structures that repeated themselves over and over again. In the stock
market, history repeats itself. This is because human nature doesn’t change.
Neither does the law of supply and demand. Price patterns of the great
stocks of the past can clearly serve as models for your future selections.
There are several price patterns you’ll want to look for when you’re analyzing
a stock for purchase. I’ll also go over some signals to watch out for that indi-
cate that a price pattern may be faulty and unsound.


The Most Common Chart Pattern: “Cup with Handle”

One of the most important price patterns looks like a cup with a handle when
the outline of the cup is viewed from the side. Cup patterns can last from 7
weeks to as long as 65 weeks, but most of them last for three to six months.
The usual correction from the absolute peak (the top of the cup) to the low
point (the bottom of the cup) of this price pattern varies from around the
12% to 15% range to upwards of 33%. A strong price pattern of any type
should always have a clear and definite price uptrend prior to the beginning
of its base pattern. You should look for at least a 30% increase in price in the
prior uptrend, together with improving relative strength and a very substan-
tial increase in trading volume at some points in the prior uptrend.
In most, but not all, cases, the bottom part of the cup should be rounded
and give the appearance of a “U” rather than a very narrow “V.” This char-

How to Read Charts Like a Pro and Improve Your Selection and Timing 113





High of handlegg
pivot




%
Depth




Base length

acteristic allows the stock time to proceed through a needed natural correc-
tion, with two or three final little weak spells around the lows of the cup.
The “U” area is important because it scares out or wears out the remaining
weak holders and takes other speculators’ attention away from the stock. A
more solid foundation of strong owners who are much less apt to sell during
the next advance is thereby established. The accompanying chart from
®
Daily Graphs Online shows the daily price and volume movements for
Apple Computer in February 2004.
It’s normal for growth stocks to create cup patterns during intermediate
declines in the general market and to correct 1½ to 2½ times the market
averages. Your best choices are generally stocks with base patterns that
deteriorate the least during an intermediate market decline. Whether
you’re in a bull market or a bear market, stock downturns that exceed 2½
times the market averages are usually too wide and loose and must be
regarded with suspicion. Dozens of former high-tech leaders, such as JDS
Uniphase, formed wide, loose, and deep cup patterns in the second and
third quarters of 2000. These were almost all faulty, failure-prone patterns
signaling that the stocks should have been avoided when they attempted to
break out to new highs.
A few volatile leaders can plunge 40% or 50% in a bull market. Chart
patterns correcting more than this during bull markets have a higher fail-
ure rate if they try to make new highs and resume their advance. The rea-
son? A downswing of over 50% from a peak to a low means a stock must
increase more than 100% from its low to get back to its high. Historical
research shows stocks that make new price highs after such huge moves
tend to fail 5% to 15% beyond their breakout prices. Stocks that come
straight off the bottom into new highs off cups can be more risky because
they had no pullbacks. Deep 50% to 75% cup-with-handle bases worked
in 2009 since they were made by a 58% drop in the S&P 500.

Average Daily Volume 5,597,700 Volume 8,373,500 $23.92 +0.88 www.apple.com Price Scale Price and Volume Chart rt h C me um o nd a e i 25.01 24.84 25 24.00 21.90 22.23 21.70 20 20.1 5 19.85 19.25 moving g i 50-day m 50-day m m d 50- age average g g g g ave e


Daily P y y y y a D 23.32 19.42 5.7M 15 1 August -44% 0.09 +8% 90–140

Computer-manufacturers DESIGNS, MANUFACTURES AND MARKETS PERSONAL COMPUTERS AND RELATED PERSONAL COMPUTING SOLUTIONS. 81 E C B 55 B N/A 72 (2.5 x SP) $8.67 Bil 362.5 Mil 24% 21.57 19.69 13.4M 9.2M 18 4 20 July June 30, 2003 vs 0.05 vs 1429.0 1545. 0 A /






NASDAQ EPS Rating Group RS Rating SMR Rating cc/Dis Rating Composite Rating Timeliness Rating Growth Rate P/E Mkt Cap Shares Funds 19.00 16.63 6 23 9 June -64% -1% N 75–85 Daily Graphs Online E-mail: custserv@d

Apple Computer Inc. (AAPL) Price ($) EPS Year High Low ($) (Sep) 16 59 0.85 1998 16 59 1.21 1999 13 75 1.69 2000 14 27 -0.19 2001 13 26 0.32 2002 12 25 0.20 2003 130% est. 0.46 2004 30% est. 0.60 2005 14.95 27.8M 24.9M 25 May 11 28 14 April March 3















114

Volume 8,373,500 $23.92 +0.88 www.apple.com Price Scale 25 21.70 20 15 RS Rating 55 Volume 9,000,000 6.3M 5,000,000 3,000,000 1,800,000 27 13 30 February EPS Due 4/16 Earnings ($) +433% Sales ($Mil) +36% Div--P/E Range 58–75 2/27/2004






18.2M
24.84
2 16 January December 31, 2003 0.03 vs vs 1472.0 All Rights Reserved
s
19.25 200-day moving n o average of prices average of prices c p p p y Average daily l d g g volume line i m 19 December 0.16 2006. 0 A /
21.90 19.85 00-d g vera Relative Price i e Strength line Strength line n g h ve l 7.1M 5 21 7 24 November +300 % 0.02 +19% N 91–116 © 2009 William O’Neil + Co., Inc.
rt
h
C
me
24.00
Average Daily Volume 5,597,700 Price and Volume Chart um o nd a e i 25.01 23.32 22.23 20.1 5 moving g i 50-day m 50-day m m d 50- age average g g g g ave e a t e n t 17.4M 10.3M 26 October 10 12 29 September September 30, 2003 vs 0.08 vs 1443.0 1715. 0 A





Daily P y y y y a D 19.42 5.7M 15 1 August -44% 0.09 +8% 90–140

Computer-manufacturers DESIGNS, MANUFACTURES AND MARKETS PERSONAL COMPUTERS AND RELATED PERSONAL COMPUTING SOLUTIONS. 81 E C B 55 B N/A 72 (2.5 x SP) $8.67 Bil 362.5 Mil 24% 21.57 19.69 13.4M 9.2M 18 4 20 July June 30, 2003 vs 0.05 vs 1429.0 1545. 0 A /






NASDAQ EPS Rating Group RS Rating SMR Rating cc/Dis Rating Composite Rating Timeliness Rating Growth Rate P/E Mkt Cap Shares Funds 19.00 16.63 6 23 9 June -64% -1% N 75–85 Daily Graphs Online E-mail: custserv@d
Apple Computer Inc. (AAPL) Price ($) EPS Year High Low ($) (Sep) 16 59 0.85 1998 16 59 1.21 1999 13 75 1.69 2000 14 27 -0.19 2001 13 26 0.32 2002 12 25 0.20 2003 130% est. 0.46 2004 30% est. 0.60 2005 14.95 27.8M 24.9M 25 May 11 28 14 April March 3
















114

How to Read Charts Like a Pro and Improve Your Selection and Timing 115


Sea Containers was a glowing exception. It descended about 50% during
an intermediate decline in the 1975 bull market. It then formed a perfectly
shaped cup-with-handle price structure and proceeded to increase 554% in



Sea Containers Price
26
Weekly Chart 22
19
16
Buy pointypuy poi t
A Strong pricei 14
Strong
action
action ononn C C C 12
a
h heavy volumey y y u 10
8
D 7
Handle dria f stst 6
10-week movingvweek g down alonggao
average lineage l lowsw
B 4.5
R Relativeltia P P Pricei
Strength linelinee 3.8
Strength
3.2
2.8
A Average weeklyverage weeklya y y 2.4
volume linem Big volummvolum e V Volumem e
clue
clue d d d dry-upu 2.0
2/1
Volume
80,000 © 2009 Investor’s Business Daily, Inc.
40,000
20,000
Mar 1975 Jun 1975 Sep 1975 Dec 1975 Mar 1976 Jun 1976 Sep 1976 Dec 1976
Limited Price
30
Weekly Chart 26
22
19
16
14
10-week movingg0-we 12
average lineverag
Buy pointypy t n 10
A
C
8
7
Shakeout inneh n 6
handlelea
D D hd R Relativei P Price
Strength lineline
Stren
Strength 5
B
4.0
3.4
3.0
A A Average weeklyverage weeklywg y y 2.6
volume linenolum V Volume supposuppom rtt 2/1 2.2
at a at shakeoutshakeoutoa
Volume
300,000 © 2009 Investor’s Business Daily, Inc.
140,000
60,000
20,000
Jun 1981 Sep 1981 Dec 1981 Mar 1982 Jun 1982 Sep 1982 Dec 1982 Mar 1983

116 A WINNING SYSTEM


the next 101 weeks. This stock, with its 54% earnings growth rate and its lat-
est quarterly results up 192%, was one of several classic cup-with-handle
stocks that I presented to Fidelity Research & Management in Boston dur-
ing a monthly meeting in early June 1975. Upon seeing such big numbers,
one of the portfolio managers was instantly interested.
As you can see by this example, some patterns that have corrected 50% to
60% or more coming out of an intermediate bull market decline or a major
bear market can succeed. (See the charts for Sea Containers and The Lim-
ited.) In most cases, the percent of decline is a function of the severity of the
general market decline and the tremendous extent of the stock’s prior price
run-up.

Basic Characteristics of a Cup’s Handle Area
The formation of the handle area generally takes more than one or two
weeks and has a downward price drift or “shakeout” (where the price drops
below a prior low point in the handle made a few weeks earlier), usually
near the end of its down-drifting price movement. Volume may dry up
noticeably near the lows in the handle’s price pullback phase. During a bull
market, volume in the majority of cases should not pick up during a correc-
tion in the handle, although there have been some exceptions.
Although cups without handles have a somewhat higher failure rate,
many stocks can advance successfully without forming a handle. Also, some
of the more volatile technology names in 1999 formed handles of only one
or two weeks before they began their major price advances.
When handles do occur, they almost always form in the upper half of the
overall base structure, as measured from the absolute peak of the entire
base to the absolute low of the cup. The handle should also be above the
stock’s 10-week moving average price line. Handles that form in the lower
half of an overall base or completely below the stock’s 10-week line are weak
and failure-prone. Demand up to that point has not been strong enough to
enable the stock to recover more than half its prior decline.
Additionally, handles that consistently wedge up (drift upward along their
price lows or just go straight sideways along their lows rather than drifting
down) have a much higher probability of failing when they break out to new
highs. This upward-wedging behavior along low points in the handle doesn’t
let the stock undergo the needed shakeout or sharp price pullback after hav-
ing advanced from the low of the base into the upper half of the pattern. This
high-risk trait tends to occur in third- or fourth-stage bases, in laggard stock
bases, or in very active market leaders that become too widely followed and
therefore too obvious. You should beware of wedging handles.
A price drop in a proper handle should be contained within 8% to 12%
of its peak during bull markets unless the stock forms a very large cup, as in

How to Read Charts Like a Pro and Improve Your Selection and Timing 117


the rather unusual case of Sea Containers in 1975. Downturns in handles
that exceed this percentage during bull markets look wide and erratic and
in most cases are improper and risky. However, if you’re in the last shake-
out area of a bear market bottom, the unusual general market weakness
will cause some handle areas to quickly decline around 20% to 30%, but
the price pattern can still be sound if the general market then follows
through on the upside, creating a new major uptrend. (See Chapter 9,
“M = Market Direction: How You Can Determine It.”)


Constructive Patterns Have Tight Price Areas
There should also be at least some tight areas in the price patterns of
stocks under accumulation. On a weekly chart, tightness is defined as
small price variations from high to low for the week, with several consec-
utive weeks’ prices closing unchanged or remarkably near the previous
week’s close. If the base pattern has a wide spread between the week’s
high and low points every week, it’s been constantly in the market’s eye
and frequently will not succeed when it breaks out. However, amateur
chartists typically will not notice the difference, and the stock can run up
5% to 15%, drawing in less-discriminating traders, before it breaks badly
and fails.


Find Pivot Points and Watch “Volume Percent Change”

When a stock forms a proper cup-with-handle chart pattern and then
charges through an upside buy point, which Jesse Livermore referred to as
the “pivot point” or “line of least resistance,” the day’s volume should
increase at least 40% to 50% above normal. During major breakouts, it’s not
uncommon for new market leaders to show volume spikes 200%, 500%, or
1,000% greater than the average daily volume. In almost all cases, it’s pro-
fessional institutional buying that causes the big, above-average volume
increases in the better-priced, better-quality growth-oriented stocks at pivot
breakouts. A full 95% of the general public is usually afraid to buy at such
points because it’s scary and it seems risky and rather absurd to buy stocks
at their highest prices.
Your objective isn’t to buy at the cheapest price or near the low, but to
begin buying at exactly the right time, when your chances for success are
greatest. This means that you have to learn to wait for a stock to move up
and trade at your buy point before you make an initial commitment. If you
work and cannot watch the market constantly, small quote devices or quotes
available on cell phones and Web sites will help you stay on top of potential
breakout points.

118 A WINNING SYSTEM


The winning individual investor waits to buy at these precise pivot points.
This is where the real move generally starts and all the exciting action
begins. If you try to buy before this point, you may be premature. In many
cases the stock will never get to its breakout point, but rather will stall or
actually decrease in price. You want a stock to prove its strength to you
before you invest in it. Also, if you buy at more than 5% to 10% past the pre-
cise buy point, you are buying late and will more than likely get caught in
the next price correction. Your automatic 8% loss-cutting rule (see Chapter
10, “When You Must Sell and Cut Every Loss . . . Without Exception”) will
then force you to sell because the stock was extended in price and didn’t
have enough room to go through a perfectly normal sharp but minor cor-
rection. So don’t get into the bad habit of chasing stocks up too high.
Pivot buy points in correct chart base patterns are not typically based on a
stock’s old high price. Most of them occur at 5% to 10% below the prior peak.
The peak price in the handle area is what determines most buy points, and
this is almost always somewhat below the base’s actual high. This is very
important to remember. If you wait for an actual new high price, you will
often buy too late. Sometimes you can get a slight head start by drawing a
downtrend line from the overall pattern’s absolute peak downward across the
peak where the stock begins building the handle. Then begin your purchase
when the trend line is broken on the upside a few weeks later. However, you
have to be right in your chart and stock analysis to get away with this.


Look for Volume Dry-Ups Near the Lows of a Price Pattern

Nearly all proper bases will show a dramatic drying up of volume for one or
two weeks along the very low of the base pattern and in the low area or few
last weeks of the handle. This means that all of the selling has been
exhausted and there is very little stock coming into the marketplace.
Healthy stocks that are under accumulation almost always show this symp-
tom. The combination of tightness in prices (daily or weekly price closes
being very near each other) and dried-up volume at key points is generally
quite constructive.


Big Volume Clues Are Valuable
Another clue that is valuable to the trained chart specialist is the occurrence
of big daily and weekly volume spikes. Microsoft is an example of an out-
standing stock that flashed heavy accumulation just before a huge run-up.
Weeks of advancing prices on heavy volume, followed in other weeks by
extreme volume dry-ups, are also a very constructive sign. If you use a Daily

How to Read Charts Like a Pro and Improve Your Selection and Timing 119



Microsoft Price
140
Weekly Chart 120
100
80
70
60
V V Veery strong price action iy strong price actionoeng ps i
o on enon enormous volumeuous
45
38
32
IPOOP 28
* * 24
20
Volume dry-up Heaviest volume weekvolume weekweemest voe k k 17
Heaviest
since going publicgoing publiccublicgoingn
along pattern lows since 15
Volume © 2009 Investor’s Business Daily, Inc.
920,000
560,000
340,000
200,000
Dec 1985 Mar 1986 Jun 1986 Sep 1986 Dec 1986 Mar 1987 Jun 1987
Graphs Online chart service in conjunction with the weekly graphs, you’ll be
able to see unusual trading activity that sometimes happens on only one day.
The day Microsoft broke out at its 31½ buy point, its volume was 545%
above average, signaling really important institutional buying. It then had a
13-year bull run from a split-adjusted 10 cents to $53.98. How’s that for a
big percentage move?
Volume is a remarkable subject that is worthy of careful study. It can help
you recognize whether a stock is under accumulation (institutional buying)
or distribution (institutional selling). Once you acquire this skill, you won’t
have to rely on the personal opinions of analysts and supposed experts. Big
volume at certain key points is indispensable.
Volume is your best measure of supply and demand and institutional
sponsorship—two vital ingredients in successful stock analysis. Learn how
to use charts to time your purchases correctly. Making buys at the wrong
time or, worse, buying stocks that are not under accumulation or that have
unsound, faulty price patterns is simply too costly.
The next time you consider buying a stock, check its weekly volume. It’s usu-
ally a constructive sign when the number of weeks that the stock closes up in
price on above-average weekly volume outnumbers the number of weeks that
it closes down in price on above-average volume while still in its chart base.


A Few Normal-Size Cups with Handles
Texas Instruments, Apple, General Cable, and Precision Castparts were all
similar-size patterns in length and depth. Can you recognize the similarity
between Apple and Precision Castparts? As you learn to do this with greater
skill, you will in the future be able to spot many cups with handles just like
these past winners.

120 A WINNING SYSTEM



Texas Instruments Price
80
Weekly Chart 70
60
50
Buy p t
Buy point
40
A A 34
C C
6 6 weeks of smallf sma
6 weeks of smallkkk ff ll 30
price
price spreadsspreadssprear 26
and tight closesgght cn e 22
D D
19
16
B
14
D
Decline stops at stops attopsn
Decline 12
top of prior base,or baf
t
a a positive sign thatiti e signs i tha t tt 10
l leaders may showwmay sr
8
Big volumeg v u 7
reversalle V V Volumeolumem e e
d dry-upypu p p V Volume uppolume upolume upmo 6
Volume
25,000
13,400 © 2009 Investor’s Business Daily, Inc.
7,400
4,000
2,200
Mar 1957 Jun 1957 Sep 1957 Dec 1957 Mar 1958 Jun 1958 Sep 1958 Dec 1958
Apple Computer Price
100
Weekly Chart
80
70
60
50
40
Buy pointtp t
34
30
A C C 26
22
D D D 19
B B 16
3 weeksweekse M M t ht h 14
3
More tightti
tight closesg tight s s
c closes 12
closess
10
8
82% bb
V V Volume up 82% abovel m p 82%
average weekly volumevolumeo
average weekly volumeeyweeklyeeklyav
average 7
Volume
80,000,000
50,000,000 © 2009 Investor’s Business Daily, Inc.
30,000,000
18,000,000
Jun 2003 Sep 2003 Dec 2003 Mar 2004 Jun 2004 Sep 2004 Dec 2004 Mar 2005

How to Read Charts Like a Pro and Improve Your Selection and Timing 121



General Cable Price
60
Weekly Chart
50
40
34
30
Buy pointpointpoin
B Buy t t 26
22
A A C C 19
16
14
D D
B B 12
3
3 tighttighttight 10
closeso
8
7
6
Volumemo e
d drrry-upyupp V V Volume upolume upum 4.5
Volume
5,000,000
3,000,000 © 2009 Investor’s Business Daily, Inc.
1,600,000
Sep 2005 Dec 2005 Mar 2006 Jun 2006 Sep 2006 Dec 2006 Mar 2007






Precision Castparts Price
160
Weekly Chart 140
120
100
B
Buy pointt t t
80
A A
C C 70
60
50
D D
B Handle 40
Handle
drifts downts dow
34
30
26
22
19
Big 16
Bigg
v volumem 14
volume
clueul Voolume upu Volumem e 12
dry-upu V Volume uplolumeo
1
Volume
8,000,000 © 2009 Investor’s Business Daily, Inc.
5,000,000
3,000,000
1,800,000
Dec 2005 Mar 2006 Jun 2006 Sep 2006 Dec 2006 Mar 2007 Jun 2007 Sep 2007

122 A WINNING SYSTEM


The Value of Market Corrections

Since 80% to 90% of price patterns are created during market corrections,
you should never get discouraged and give up on the stock market’s poten-
tial during intermediate-term sell-offs or short or prolonged bear markets.
America always comes back because of its inventors and entrepreneurs and
the total freedom and unlimited opportunity that do not exist in communist
or dictator-controlled countries.
Bear markets can last as little as three, six, or nine months or as long as
two or, in very rare cases, three years. If you follow the sell rules in this book
carefully, you will sell and nail down most of your profits, cut short any
losses, raise significant cash, and move off margin (borrowed money) in the
early stages of each new bear market (see the success stories at the end of
the book).
In fact, Investor’s Business Daily conducted four surveys in late 2008 that
indicated that about 60% of IBD subscribers used our rules to sell and raise
cash in December 2007 or June 2008 and thereby preserved most of their
capital prior to the more serious decline in late 2008 that resulted from the
subprime loan debacle.
Even if you sell out completely and move to cash, you never want to
throw in the towel on stock investing because bear markets create new bases
in new stocks, some of which could be the next cycle’s 1,000% winners. You
don’t foolishly give up while the greatest opportunities of a lifetime are set-
ting up and may sooner or later be just around the corner.
A bear market is the time to do a postanalysis of your prior decisions. Plot
on daily or weekly charts exactly where you bought and sold all the stocks
you traded in the past year. Study your decisions and write out some new
rules that will let you avoid the mistakes you made in the past cycle. Then
study several of the biggest winners that you missed or mishandled.
Develop some rules to make sure that you buy the real leaders and handle
them right in the next bull market cycle. They will be there, and this is the
time to be watching for them as they begin to form bases. The question is
whether you will be there with a carefully thought-through game plan to
totally capitalize on them.

Other Price Patterns to Look For
How to Spot a “Saucer-with-Handle” Price Pattern
A “saucer with handle” is a price pattern similar to the cup with handle except
that the saucer part tends to stretch out over a longer period of time, making
the pattern shallower. (If the names “cup with handle” and “saucer with han-
dle” sound unusual, consider that for years you have recognized and called

How to Read Charts Like a Pro and Improve Your Selection and Timing 123



Jack Eckerd Price
50
Weekly Chart 40
34
Buy
Buy pointu y pointtpointo 30
26
A A A C C 22
19
16
D D 14
12
B B 10
8
7
V Volume upolumee upo me upppup 6
Volume © 2009 Investor’s Business Daily, Inc.
7,200
3,200
1,400
600
200
Mar 1966 Jun 1966 Sep 1966 Dec 1966 Mar 1967 Jun 1967 Sep 1967
certain constellations of stars the “Big Dipper” and the “Little Dipper.”) Jack
Eckerd in April 1967 was an example of the saucer-with-handle base.

Recognizing a “Double-Bottom” Price Pattern
A “double-bottom” price pattern looks like the letter “W.” This pattern also
doesn’t occur quite as often as the cup with handle, but it still occurs fre-
quently. It is usually important that the second bottom of the W match the
price level (low) of the first bottom or, as in almost all cases, clearly undercut
it by one or two points, thereby creating a shakeout of weaker investors. Fail-








Middle of “W” ”
p pivot





Depth % Depth%








Base len
Base lengthgt

124 A WINNING SYSTEM


ure to undercut may create a faulty, more failure-prone “almost” double bot-
tom. Double bottoms may also have handles, although this is not essential.
The depth and horizontal length of a double bottom are similar to those
of the cup formation. The pivot buy point in a double bottom is located on
the top right side of the W, where the stock is coming up after the second
leg down. The pivot point should be equal in price to the top of the middle
peak of the W, which should stop somewhere a little below the pattern’s
peak price. If the double bottom has a handle, then the peak price of the
handle determines the pivot buy point. See the accompanying charts for
Dome Petroleum, Price Co., and Cisco Systems for outstanding examples
of double-bottom price patterns found during 1977, 1982, and 1990. Some
later examples are EMC, NVR, and eBay.
For double-bottom patterns, the following symbols apply: A = beginning
of base; B = bottom of first leg; C = middle of W that sets the buy point; D =
bottom of second leg. If the double-bottom pattern has a handle, then E =
top of the handle (sets the price of the buy point that occurs several weeks
later) and F = bottom of the handle.









Dome Petroleum 190
160
Weekly Chart 140
120
100
80
3
3 weeks ofweeks of 70
tight closess
60
Buy pointny t
A A 50
C C
40
Seco
Second leg down ol
unde
undercuts the firstd t th fie first t tt 34
B B 30
D D
26
22
19
16
14
Volume dm r ry-upp p Volume uppeu e upp
at
at bottombottomt 12
Volume
140,000
80,000 © 2009 Investor’s Business Daily, Inc.
40,000
Sep 1977 Dec 1977 Mar 1978 Jun 1978 Sep 1978 Dec 1978 Mar 1979

How to Read Charts Like a Pro and Improve Your Selection and Timing 125



Price Co. Price
60
Weekly Chart
50
40
34
30
Strong price iig
St S
Buy
action
a
action ononn Buy pointpointy t t 26
A
huge volumeg volu 22
h
C E E E
19
16
F F
14
B 12
D D 10
Relative Strength Line
Second leg down at D at new high before price 8
undercuts the first at B makes new high
7
6
V Volume upolume upme up
V Volume upolume upmo p p 5
3/1
Volume
160,000
80,000 © 2009 Investor’s Business Daily, Inc.
40,000
Jun 1981 Sep 1981 Dec 1981 Mar 1982 Jun 1982 Sep 1982 Dec 1982 Mar 1983
Cisco Systems Price
100
Weekly Chart 80
70
60
50
40
34
30
26
Buy
Buyyy
Tight pricepriceet
T Tight e e pointn 22
point
a
action
action 19
E
A A 16
C 14
12
F F F
10
B S Second leg downeg d
D D D u undercuts the firsthe firss the st stt 8
undercuts
7
2/1
Volume
1,600,000 © 2009 Investor’s Business Daily, Inc.
800,000
400,000
200,000
Jun 1990 Sep 1990 Dec 1990 Mar 1991 Jun 1991 Sep 1991 Dec 1991 Mar 1992

126 A WINNING SYSTEM



E M C Price
40
Weekly Chart 34
30
26
22
19
16
14
12
10
Buy point t t 8
Buy pointy po
A A A C C C 7
6
B B E EMC k k 4.5
EMC has nohas non rrmal pullbackmal pullbackapm
D D to buy point and 10-weekyp int auo e k 3.8
m
Second bottom droppdd bot s moving average linenveragng av
below first bottomfirst bottomofirst
below 3.2
2.8
3/2 2/1
Volume
1,600,000 © 2009 Investor’s Business Daily, Inc.
800,000
400,000
200,000
Mar 1992 Jun 1992 Sep 1992 Dec 1992 Mar 1993 Jun 1993 Sep 1993 Dec 1993


N V R Price
Weekly Chart 400
340
300
B
Buy
Buy pointpointp t t 260
A A 220
C
E E 190
P P Prior uptrender d
160
140
F
120
B
D D 100
Second bottom moecond
at 80
at D undercuts D undercutssct D un
first one at B one at Btrst on
first 70
60
45
V V Volumolumu mee 38
d dry-up p V Volume uppolume upolume upeu 32
Volume
Big volume on me o
p p prior uptrendrendi p pt d 440,000 © 2009 Investor’s Business Daily, Inc.
320,000
220,000
160,000
Sep 2000 Dec 2000 Mar 2001 Jun 2001 Sep 2001 Dec 2001 Mar 2002 Jun 2002

How to Read Charts Like a Pro and Improve Your Selection and Timing 127



eBay Price
140
Weekly Chart 120
100
80
70
60
Buy point is after shake-
3 weeks of fk out at D turns back up 50
g tight closesec by 3 points higher than
low price at B 40
A A 34
C C F Follow-up buy pointll wo b buy p i tt
from e e 30
from 7-week flat bas7 week flat basaeek fla7o
26
B B 22
D
19
S Second bottom at Dtond
undercuts e e e 16
undercuts below first onebelow first onew firstbdercu
at B and reverses up toB and reverses up toes up vB and
at 14
c ose a pea oase ase at ee ee
close at peak for weekr weea
12
V Volume uppolume uppm
2/1
10
Volume
80,000,000
50,000,000 © 2009 Investor’s Business Daily, Inc.
30,000,000
18,000,000
Jun 2002 Sep 2002 Dec 2002 Mar 2003 Jun 2003 Sep 2003 Dec 2003 Mar 2004
Definition of a “Flat-Base” Price Structure
A flat base is another rewarding price structure. It is usually a second-stage
base that occurs after a stock has advanced 20% or more off a cup with han-
dle, saucer with handle, or double bottom. The flat base moves straight side-
ways in a fairly tight price range for at least five or six weeks, and it does not
correct more than 10% to 15%. Standard Oil of Ohio in May 1979, Smith -
Kline in March 1978, and Dollar General in 1982 are good examples of flat
Price
Surgical Care Affiliates 22
19
Weekly Chart 16
14
12
Buy
Buy point 10
Buy pointtpointn
8
7
6
5
F Flat baseeb
4
4 4 weeks
4 eekseekseeks 4.0
tigh
tight closesht clo
3.4
3.0
2.6
Big volume cluee clu vol
Big volume clue
5/4 3/2
2.2
Volume © 2009 Investor’s Business Daily, Inc.
320,000
160,000
80,000
40,000
20,000
Jun 1988 Sep 1988 Dec 1988 Mar 1989 Jun 1989 Sep 1989 Dec 1989

128 A WINNING SYSTEM


Price
C B Richard Ellis 100
Weekly Chart 80
70
60
50
40
34
Buy pointyypuy po
B Buy pointi t 30
26
Notice
IPO Notice how tight closeshow tight closesecw tigotice s s 22
dominate pattepattepattemina
dominate r rnn 19
* 16
F Flat t t 14
Flat base justbase justsbase
a a affter IPOter IPOr IPO 12
10
Volume © 2009 Investor’s Business Daily, Inc.
4,000,000
1,600,000
800,000
400,000
200,000
Jun 2004 Sep 2004 Dec 2004 Mar 2005 Jun 2005 Sep 2005 Dec 2005
Deckers Outdoor Price
190
Weekly Chart 160
140
120
100
Buy pointppoint
B Buy point
80
70
Noormal pullbackpl c 60
to buy pointnbuy p
yp
yp
50
Flat baset bas
40
34
30
26
22
V V lolume uppumeu 19
Volume © 2009 Investor’s Business Daily, Inc.
1,600,000
800,000
400,000
200,000
Sep 2006 Dec 2006 Mar 2007 Jun 2007 Sep 2007 Dec 2007
bases. Pep Boys in March 1981 formed a longer flat base. If you miss a
stock’s initial breakout from a cup with handle, you should keep your eye on
it. In time it may form a flat base and give you a second opportunity to get
on board. Here are a few more recent examples: Surgical Care Affiliates,
CB Richard Ellis, and Deckers Outdoor.
Here’s a New Base We’ve Dubbed a Square Box
After moving up from a cup with handle or double bottom, this formation
typically lasts four to seven weeks; doesn’t correct too much, usually 10% to
15%; and has a square, boxy look. I’ve noted this over recent years, but
finally we’ve studied, measured, and classified it. Here are some examples:
Lorillard, Korvette, Texas Instruments, Home Depot, Dell, and Taro. The
dashed line shows the buy point.

How to Read Charts Like a Pro and Improve Your Selection and Timing 129



Lorillard Price
100
Weekly Chart 80
70
60
Base g
Base forms duringdurinm
1957 bear marketbear marketarkea957
1957 50
40
Buy pointi to
B
Buy pointtyy
34
30
26
22
Sq
S S Squareaq re N Norrmal pullback to 10-weekmal pullback to 10 weekweek to mal p k k 19
No
b boxo
m
moving
moving average lineaveragering a g linee line 16
g
14
12
Volume dlume rry-uppp p p p Volume up plum
along lowslowssong l
on new highnew highgnew
along g g on g g 10
P P P P irior uptrend rend d d Volume © 2009 Investor’s Business Daily, Inc.
t
h h higher volumeolumigheigher volume 120,000
70,000
40,000
20,000
Jun 1957 Sep 1957 Dec 1957 Mar 1958 Jun 1958 Sep 1958 Dec 1958
Korvette Price
50
Weekly Chart 40
34
30
26
22
19
Buy pointp poi
B B Buy pointii
16
Cup-with-handleewith-hanwu 14
Cup-with-handlehandle
Cup
12
10
S S
Squarea e
b box 8
boxx
box
7
B Big volume on ono
Big volume onovolumvolumevolum
Big 6
B
Volumolume on puln pum pull b breakout from boxom bokout 3/1
p p pullback subsidesssubsc
Volume © 2009 Investor’s Business Daily, Inc.
120,000
70,000
40,000
20,000
Sep 1960 Dec 1960 Mar 1961 Jun 1961 Sep 1961 Dec 1961 Mar 1962
Texas Instruments Price
190
Weekly Chart 160
140
120
100
Buy yp ointtt 80
yppoint
Buy pointuy po
70
60
45
S S Squarerq e 4 4 weekskweeks tighttgtightti htg 38
S
box
b b bo 32
box
28
V Volume upppolume upolume upme upolum 24
20
Volume © 2009 Investor’s Business Daily, Inc.
16,000
8,000
4,000
2,000
Mar 1958 Jun 1958 Sep 1958 Dec 1958 Mar 1959 Jun 1959 Sep 1959

130 A WINNING SYSTEM



Home Depot Price
34
30
Weekly Chart 26
22
19
16
14
12
Buy pointtyppointy poi
Buy
Buy point 10
8
Suppoou 7
Supporrt at tata
10-week lineweek lineie0
10 6
ki
S
Squarer 3 3 weeks tight closesecks tigw k i h l
along bottom of basebottom of baseaobotton
box
box along e e 4.5
b
5 tight weeksstighttight Huge 3.8
5
5 tight weeksweekse
Huge
Huge volumeelvolumee vol
H Huge volume
3/2 5/4 2/1 3.2
Volume © 2009 Investor’s Business Daily, Inc.
160,000
80,000
40,000
20,000
Sep 1981 Dec 1981 Mar 1982 Jun 1982 Sep 1982 Dec 1982 Mar 1983
Dell Computer Price
100
Weekly Chart 80
70
60
50
40
Buy
Buy pointpoint 34
Buy pointtyy poiy
30
26
22
P P P Prior uptrendrior uptrenduptrer 19
S S S
Squarerq
Square 16
box
boxo 14
Volume upppolum 12
on breakouton bre t
V V V V V llume up onume uppoluoluoolu p p p p p p onnnonn 2/1 2/1 10
o
prior uptrenderior uii t d Volume © 2009 Investor’s Business Daily, Inc.
50,000,000
30,000,000
18,000,000
Jun 1996 Sep 1996 Dec 1996 Mar 1997 Jun 1997 Sep 1997 Dec 1997
Taro Pharmaceutical Price
100
Weekly Chart 80
70
60
50
40
34
30
Buy pointi t
Buy pointtypuy po
B
3 weeks tightkkw 26
3 weeks tighti hg
3
22
19
16
14
Squareq 12
Squa
b
box
V Volumell e 10
supporrrtt
suppop p pp V V V V Volume uppolume upolume upu 8
Volume © 2009 Investor’s Business Daily, Inc.
2,500,000
1,340,000
740,000
400,000
220,000
Mar 2000 Jun 2000 Sep 2000 Dec 2000 Mar 2001 Jun 2001 Sep 2001

How to Read Charts Like a Pro and Improve Your Selection and Timing 131


High, Tight Flags Are Rare
A “high, tight flag” price pattern is rare, occurring in no more than a few
stocks during a bull market. It begins with the stock moving generally 100%
to 120% in a very short period of time (four to eight weeks). It then corrects
sideways no more than 10% to 25%, usually in three, four, or five weeks.
This is the strongest of patterns, but it’s also very risky and difficult to inter-
pret correctly. Many stocks can skyrocket 200% or more off this formation. (See
the charts for Bethlehem Steel, May 1915; American Chain & Cable, October
1935; E. L. Bruce, June 1958; Zenith, October 1958; Universal Controls,
November 1958; Certain-teed, January 1961; Syntex, July 1963; Rollins, July
1964; Simmonds Precision, November 1965; Accustaff, January 1995; Emulex,
October 1999; JDS Uniphase, October 1999; Qualcomm, December 1999;
Taser International, November 2003; and Google, September 2004. Each ear-
lier pattern serves as a precedent for each later pattern, so study them carefully.

Price
Bethlehem Steel 600
500
Weekly Chart 400
340
300
260
Buy point
Buy
Bethlehem Steel sem Sh
B Bethlehem Steel serrves as a precedent ves as a precedent deas a v Buy pointtpointiy 220
for American Chain & Cable in 1935 American Chain & Cable in 193551& CaaricanAo
for 190
a and everygyy high tight flag aygy hi g g i flag gg g fter thathe 160
140
Flagpole
Flagpolea 120
igh tightgh tighttgh tg
Hi
Higig t t t 100
fla fla
flagg g g
80
70
60
45
38
Volume © 2009 Investor’s Business Daily, Inc.
No trading duringng duringo tratrading during 30,000
No
W W Worlddorld WWWar Iar I 14,000
6,000
2,000
Jun 1914 Sep 1914 Dec 1914 Mar 1915 Jun 1915 Sep 1915 Dec 1915
Price
American Chain & Cable 80
Weekly Chart 70
60
50
40
34
yppo
Buy pointuyuy po oint 30
yp
26
3 weeks tightheks t
3 weeks tigh
22
19
A
American Chain & Cable now Chain & Cable nowe& Can Ch
American 16
H H H H High tightgh tig g t givess youyouu aa secondsecondos p precedentc 14
precedent
gives
g
f flag g
for
for EL BEL BEo r ruce in 1958uce in 19581958e 12
V Volume on new higholume on new highhignume h h 10
breakout up from makou
p prior week’s volumeweek’s volumelumesr we
prior 8
Volume © 2009 Investor’s Business Daily, Inc.
15,600
9,400
5,600
3,400
2,000
Sep 1935 Dec 1935 Mar 1936 Jun 1936 Sep 1936 Dec 1936

132 A WINNING SYSTEM


Price
E L Bruce 80
Buy pointpyppoin
Buy point 70
B
Weekly Chart
60
50
45
40
High
Hig
High tighttighthh t t 36
fla
flag
flaggg g g g 32
28
24
20
18
16
14
12
11
10
Volume
V Volumeolumeolume 30,000 © 2009 Investor’s Business Daily, Inc.
increasecreas 14,600
increase
7,800
4,200
2,200
Dec 1956 Mar 1957 Jun 1957 Sep 1957 Dec 1957 Mar 1958 Jun 1958
Z
Zenith
Zenith Z Z Zenith now becomes a 4th precedent for now becomes a 4th precedent fornt foprece4omesnow bt r rred onlyred onlyed on y y Price
140
t t the next high tight flag that occunext high tight flag that occuoccutght flat highn
the
3 3
Weekly Chart 3 3 3 weeks later on Universal Controlsweeks later on Universal ControlssContsn Unis latee 120
100
80
70
Buy pointtppointnp 60
B
Buy
Buy point
45
38
High tighttightg
H H High t 32
flaga
flag g 28
24
20
17
15
2/1 3/1
13
Volume © 2009 Investor’s Business Daily, Inc.
80,000
50,000
30,000
18,000
Dec 1957 Mar 1958 Jun 1958 Sep 1958 Dec 1958 Mar 1959 Jun 1959
Universal Controls Price
100
Weekly Chart 80
70
60
50
Buy point
Buy pointypuy po
N Noww, you can check your precedents to see hkk yocou ca p ceden to se 40
d
if if Universal Controls looks like any one of thUniversal Controls looks like any one of the ofe anyss lonersal he he 34
previous high tight flags. And you now havehigh tight flags And you now havew hayouAndflagtus higv
previous e 30
5 examples to use for the next hight flag,examples to use for the next hight flaglhnextfor tumplesx 26
5
High tightgh tihhh tight
ght
Ce r ry 1961y 19619y H High tig ght 22
Cerrtain-teed in Januatain-teed in Januaun-teedt
flagggg g g g 19
16
14
V V Volumeolumeu 12
p p up 10
2/1
Volume © 2009 Investor’s Business Daily, Inc.
30,000
14,000
6,000
2,000
Dec 1957 Mar 1958 Jun 1958 Sep 1958 Dec 1958 Mar 1959 Jun 1959