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

Saucer

The Saucer base is basically a long, drawn out cup base. Characteristics of a Saucer are:
1. A depth of 12-20%.
2. A length of 7 weeks to more than a year.
3. If a handle forms then the buy point is the peak just before the pull back plus 10 cents.
4. However a handle will often not form after the long period of this base. If there is no handle then the buy point is the peak on the left side of the saucer plus 10 cents.

Double Bottom

The Double Bottom Base resembles a “W”. The characteristics of  a double bottom to watch for are:
1. A depth of about 35%.
2. A length of at least 7 weeks.
3. Middle peak lower than the first, and above the midpoint of the entire base.
4. Low of second leg should be lower than first leg.
5. Buy point is 10 cents plus the middle peak.
 
There are also technical reasons why these patterns work. The uptrend at the begining of each base shows there is a record of price growth and that the stock has gotten support from large institutional investors which make up the majority of buying and selling that happens in the stock market. The downturns in the bases are often a result of selling by the big investors in order to take profits, or a downturn in the overall market has occured. This also shakes out smaller investors who bought at the peak. Once the major selling has subsided, the big investors begin to accumulate the stock again, and the price will begin to rise signaling strength in the stock. When the stock price approaches the price of the initial peak again, selling will start as investors who waited out the downtrend have recouped there losses and sell in order to break even or make a small gain (overhead resistence). This selling is where the handle forms and further shakes out the weaker investors. Once those investors are gone, the stock faces less resistence or selling pressure and the stock is free to break out and head higher.

The key to being succesful reading bases is to be able to spot them as they form. If you spot the base after it has already completed, then you will often miss the buy point. It’s easy to see the pattern after it has formed and the stock has run up, but spotting the pattern and following it to the proper buy point takes experience. It is best to watch for bases on a weekly chart, then use a daily chart to determine what the correct buypoint is. Once a buypoint is determined a Buy Stop Order can be placed to purchase shares at the price. Being sure to buy stocks at the correct buypoints after spotting a base provide a much greater chance at making money on a stock, but nothing is full proof and there will be times when the breakout fails and the stock procedes to fall and it won’t neccesarily recover no matter how strong the fundamentals look. That is why it is of utmost importance to always cut your losses at 7-8% from your buypoint. Cutting losses will ensure you live to see another day.

My next post I will look at 3 more Chart Base patterns…

• Line chart – The most basic chart. Shows the closing price for each day or week over the time period. 

Line Chart

• Open High Low Close (OHLC) – shows the day or weeks range as a vertical line with the opening (1) and closing (4) prices as horizontal lines coming off of the vertical line. It should go without saying that the high (2) is the top and the low (3) is the bottom of the vertical line.

OHLC Chart

• Candlestick – similar to the OHLC, but resembles a candlestick. Up days are often displayed as an empty box or filled green, and down days are often filled red. The opening (1) and closing (4) are the top and bottom of the box (if up day then the opening is the bottom, if down day then the opening is the top). The high (2) and low (3) are represented by the vertical line.

Candlestick Chart

I prefer the Candlestick chart as I think it gives the best visual representation of a stocks history. However most chart hosting websites will only display a line chart with the closing prices when viewing the history over a year or more in the past.

One key aspect of stock charts is the volume. Volume is the amount of shares traded for each period of time (hour, day, week etc). If you spot a spike in volume, that is often an indicator of institutional investors (mutal funds, pension funds, hedge funds) buying or selling large amounts of shares. If the stock price goes down on high volume then that indicates institutional selling (a bad sign), and if the price goes up on high volume that indicates institutional buying (a good sign). More on volume in an upcoming post on chart patterns.

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.

1. Most recent Current Quarterly Earnings must be up at least 25% from the previous years same quarter.
2. Annual earnings must be up at least 25% for each of the last 3 years.
3. Look for new products or services, new management, or new conditions. Also new price highs.
4. Look for stock coming out of a base on higher than normal volume
5. Look for leading company’s in their industry.
6. Look for institutional sponsorship.
7. 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.

1. Take a profit when the stock increases 20% from my buy point (unless the stock increases more than 20% in less than 3 weeks).
2. Cut losses short at no more than 8% below my buy point.
3. 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.

I’m still in my begining stages of investing and learning, so I have only allowed myself to invest a total of $3,500 so far. I plan on gradually increasing that amount as I am able. I am a little risk averse, and I’m not going to invest my savings in stocks. My excess money from my paychecks first goes to 401k retirement plan, then to high interest savings accounts like ING Direct and Ally Bank, then I set aside some money to put into stocks. The more comfortable and confident I get with stock market investing, the more I will put into my brokerage account.

The broker I am currently with is the online brokerage Scottrade. They have great customer service, are easy to use, and best of all it only costs $7 per trade. There’s no hidden fees and no minimums to start. There are a large number of online brokers out there, and all have different price structures and different things to offer. I started with Scottrade and like them, so I’m sticking with them (at least for now – one day I plan on writing some reviews of different brokerages).

My current day job is as an IT professional, and I entered the stock market without any knowledge or training in the field. I imagine the same is true for many others and they most likely have similar results to what I have had – not great.  Starting my stock learning journey at the height of the Bull market in April, 2008, I thought it would be easy MONEY. Well, I soon found out that making money trading stocks is NOT easy. The market started its latest crash later in 2008 and my stocks went with it in the epic decline. I can’t stand losing money! (who does?) and I’m not one to give up either. So I decided I would learn as much as I could before buying any more stocks. I began reading books on investing and studying the market in earnest. But reading can only take me so far; I need to immerse myself to really learn. I am striving to take the advice of William O’Neil’s How To Make Money in Stocks; “Don’t just dabble in stocks…DIG IN.” Another recurring imperative is to keep a stock journal and I thought a website would be a great way to do just that and immerse myself in stocks at the same time.

Of course, I’m not going to quit my day job (although sometimes I would like to). My job is what allows me to actually play this stock market game and I am able to follow the markets somewhat while I am at work too. If I couldn’t then I probably wouldn’t be in stocks at all.  But most of my research is done during the few hours I have between work, spending time with my fiancé, and sleep; and that probably puts me at a big disadvantage to those who really do do this for a living.

Stocks are basically a zero sum game. In essense you buy a stock because you think it’s going up from someone who is selling because he thinks it’s NOT going up. Only one of you is right; so you’re either losing money and the guy on the other end is making money, or you’re making money and the guy on the other end is losing money. So maybe I’m stupid for even trying (my girl certainly thinks so), but still I’m determined to be successful and I’m confident I will be.  Plus it’s exciting!

This is also my first website/blog and am learning how to run a website as I go. Things may be a little slow to start, so please bare with me as I get the site ramped up. And please feel free to comment, and make suggestions.