“The way to learn to do things is to do things. The way to learn a trade is to work at it. Success teaches how to succeed. Begin with the determination to succeed, and the work is half done already.” -Benjamin Franklin
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On the night of April 20, 2010 the Deepwater Horizon oil rig had an explosion, and two days later, it sank in the Gulf of Mexico. The rig was operated by British oil giant BP but owned by Transocean, the world’s largest offshore drilling company. The incident ruptured the oil well and to date has caused over 90 million gallons of oil gush into the Gulf of Mexico. The cost of stopping the spill and clean up is expected to be in the tens of billions of dollars.
Take a look at BP’s stock chart which has declined over 50% since the Gulf Oil Spill broke.
 BP has declined 50% to date since the Gulf Oil Spill
Transocean’s (RIG) stock has had a similar pattern and has lost nearly 50% as well.
This disastrous event was (and still could be) a perfect opportunity for making some huge gains shorting a stock. File this under the “Shoulda, Woulda, Coulda” section for me. I am sure there are numerous investors who caught on to this early and have made a lot of money off of it.
In my last post I demonstrated the very basics of reading a stock chart. The next step is learning how to spot chart base patterns and when to buy a stock. A chart base often acts as a foundation for stocks to “jump” off of; to begin a large share price increase. Spotting and understanding chart bases is a science that takes time and experience to learn. It is a skill that I am still working on, and I hope that writing this post will help ingrain the concepts in my own head. That being said, the best resource I have found for learning about chart patterns and all the intricacies is William J. O’Neil’s book, How to Make Money In Stocks and Investors Business Daily/Investors.com.
There are several base patterns that William O’Neil and company have studied and present to us to watch for. “Cup-With-Handle”, “Saucer”, “Double Bottom”, “Flat Base”, “Ascending Base”, and “3 Weeks Tight” are 6 principal patterns.
Cup-With-Handle
The Cup-with-Handle Base is probably the most common base pattern. It looks a bit like a tea cup when viewed from the side. Here are characteristics to look for as this pattern forms:
1. A prior uptrend of 20-30%.
2. Depth of 15-35% from peak of prior uptrend to bottom of cup.
3. Length of at least 7 weeks from start of the “cup” to the end of the “handle”.
4. Handle formed in top half of base and a pullback of 10-15%.
5. The buy point will be when, after the dip, the price reaches the same price as the handle peak plus 10 cents. You want to see this “breakout” to the new high on higher than normal volume.
 Apple Chart - Cup with Handle Base. Click to see full Price Increase
Here’s an example of a Cup-with-Handle in action. Apple (APPL) broke out in March 2004 and went on to post over 1400% in gains in less than 4 years.
1. Cup with Handle Base.
2a. Handle drifts down along lows.
2b. Volume dry up in handle.
3. Buypoint – 10 cents plus peak of handle.
4a. Breakout.
4b. High Volume on breakout.
Continue reading Chart Base Patterns
A basic foundation of researching stocks is the stock chart. Stock charts give us a picture of how stocks have performed in the past, and can give us clues on how they might perform in the future. A basic chart simply displays a stock’s prices over a certain period of time. The time period can be any where from hours to years to decades. Commonly charts would be daily or weekly prices over a period of 1month to 1 year (52 weeks) along with each day’s/week’s volume. The stock’s price is often displayed in 1 of 3 ways – line chart, OHLC chart, or Candlestick chart.
- Line chart – The most basic chart. Shows the closing price for each day or week over the time period.
 Line Chart
Damn, I have really been slackin’ on posting this month. I have a lot of respect for bloggers who post everyday. It can be quite hard to find the time, energy, and inspiration to do this day in and day out, especially after a long day at the “day job”. That being said, I do have a lot of ideas running around in my head, and a lot of hopefully good posts in the works. So if you happen upon this infant fetus of a blog, I hope you return!
I just wanted to take a quick look back at the latest developments in my personal “portfolio” of stocks. The last stock I purchased, ASIAInfo holdings, has shot up over 20% since my purchase after an announcement on Dec. 6 that it is acquiring Linkage Technologies. It feels pretty darn good when a stock you very recently purchased shares of jumps like that. My Sell Rules say to sell when a stock has risen 20% from my buy point UNLESS it has risen more than 20% in less than 3 weeks. Since that is the case, I will consider holding on to it for a long term capital gain while continuing to watch the price/volume action.
The other issue I recently purchased is IAMGOLD (IAG). IAG has not faired that well since my purchase. It gained about 12% in 2 weeks, then reversed and nearly triggered my 8% stop loss. But IAG appears to be working on a new base, so I am still optimistic that I can come out on top with it.
And finally, back in October I posted about Visa reporting a $1 billion stock buyback program. Since that announcement, Visa has gained over 14%!
Even with these recent gains, I still by no means consider myself a proficient investor. Overall I have only in the last couple weeks overcome my losses, now only up about $200 on my total investments. To be succesfull I need to continue learning, and assessing my trades.
Today I bought 34 shares of ASIAInfo Holdings (ASIA) @$25.64. ASIA is a Chinese provider of software and IT Security products for telecommunications operators in China. I had been watching ASIA for a couple months, noting that it had great fundamentals. ASIA was also hovering around the 50 DMA, and I have noticed that many times, once a stock breaks the 50 DMA decisively after hovering around it for awhile, will often post big price gains. I should have been decisive and bought ASIA when I first started watching it when it was at around $18, because it has since risen over 40% after bouncing off the 50 DMA twice.
Here’s the fundamentals:
- Quarterly EPS % Chg. 75%
- 3 Year EPS Growth Rate 77%
- Annual Earnings Est. % Chg. 61%
- Quarterly Sales % Chg. 42%
- 3-Year Sales Growth Rate 31%
- Profit Margin 19.0%
- Debt % 0
I bought 35 shares of IAG yesterday @18.12. IAG has been taking off lately, and I may have bought to far past its buy point. But with gold soaring to new heights and the stock market continuing to rally, I think that IAG has real potential to continue its uptrend.
Here are some fundamentals:
- Quarterly EPS % Chg. 125%
- 3 Year EPS Growth Rate 17%
- Annual Earnings Est. % Chg. 42%
- Quarterly Sales % Chg. 4%
- 3-Year Sales Growth Rate 51%
- Profit Margin 21.7%
- Debt % 0%
It turns out that I bought into all the hype that a big market correction was due. That this time around (last week) would be different from the past market dips of the year, and that the market would not resume an uptrend as quickly as before.
In reality the market followed the same pattern as it has since March. After a short correction of 9 days, the market reversed, then had a high volume up day on Monday, Nov. 09 signaling that the correction is over. The correction was basically over right when I, and just about everyone else believed it was just beginning.
Lesson learned here, is to just follow what the Market itself tells, not what all the “experts” say. As long as you are careful, and keep to a disciplined stop loss plan of no more than 8% you won’t get hurt by the market when it actually does have a steep correction.
Market “experts” have been saying for months that the market has risen too far too fast and we are due for a correction. We’ve had a couple small dips during this uptrend ongoing since March, but there has yet to be any real correction. Is this finally about to be the correction I’ve been hearing was coming soon?
I believe it might be. The indexes have had 6 down days in the last 8 all on fairly heavy volume. Yesterday the indexes crashed through their 50 day moving averages, and today there was alot of churning but finished up for the day a bit. Instead of bouncing off the 50 DMA to higher values as happened during the last dip, the 50 DMA provided resistence for the indexes. Of course it is possible that I am completely wrong and the market will continue to rise, but untill we are in a definite uptrend, I believe it is best to stay out, or in the very least not buy anything. One of my investment rules from my last post is to be sure the Market is in an uptrend before buying. Meanwhile I am going to research and develop a watch list and be ready once a definite uptrend does resume. Corrections and dips in the market often provide the best opportunities for buypoints because they allow stocks’ charts to form bases, or if a stock holds up under the pressure of a correction it is a good bet that once the uptrend resumes, that stock will take off.
In one of my next posts I am going to look at chart patterns, bases, and how to spot a correct buypoint.
One characteristic of every successful investor is that they all adhere to a set of investment rules. It is one thing to have rules, but it is not an easy thing to follow them and these rules will likely be more guidlines than hard and fast rules. Following are my rules that I intend to follow. Anytime I buy a stock I will have a checklist for each of these rules. These rules will also likely be added to or modified as I continue to learn from my mistakes and successes.
Buy Rules
Buying a stock is easy, maybe too easy. Anyone can hear a tip, or read about a company and go to a broker and purchase some shares. But I believe in being selective, and doing research before diving in. These Buy Rules should keep me from buying on a whim, which I’m sure leads alot of investors to bad results.
- Most recent Current Quarterly Earnings must be up at least 25% from the previous years same quarter.
- Annual earnings must be up at least 25% for each of the last 3 years.
- Look for new products or services, new management, or new conditions. Also new price highs.
- Look for stock coming out of a base on higher than normal volume
- Look for leading company’s in their industry.
- Look for institutional sponsorship.
- Be sure the overall Market is in an uptrend.
Sell Rules
As I said before, BUYING a stock is easy. The hard part is selling! Amatuer investors will often buy a stock, and hold on to it as it tanks thinking that it will bounce back, but it never does. If a stock does go up, then many investors will hold on too long thinking they will miss out on even more profits if they sell too soon, but then the stock reverses and any gains are quickly lost. Hopefully these sell rules will keep me from holding on to losers, and allow me to take good profits.
- Take a profit when the stock increases 20% from my buy point (unless the stock increases more than 20% in less than 3 weeks).
- Cut losses short at no more than 8% below my buy point.
- If there are 3 consecutive general market up days, and the stock has fallen or failed to keep pace with the market each of those days.
On October 27, Visa announced a $1 billion stock buyback program after reporting a 4th quarter profit of $514 million. This is good news for anyone owning shares of Visa such as myself. When a company buys its own stock this reduces the number of outstanding shares and results in higher earnings per share (EPS) which is one of the main drivers of stock price. A stock buyback also implies that the company is expecting earnings to increase in the future, which again means higher EPS and increasing stock price.
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