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

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.

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.

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.

Here’s the fundamentals:

1. Quarterly EPS % Chg. 75%
2. 3 Year EPS Growth Rate 77%
3. Annual Earnings Est. % Chg. 61%
4. Quarterly Sales % Chg. 42%
5. 3-Year Sales Growth Rate 31%
6. Profit Margin 19.0%
7. Debt % 0

Here are some fundamentals:

1. Quarterly EPS % Chg. 125%
2. 3 Year EPS Growth Rate 17%
3. Annual Earnings Est. % Chg. 42%
4. Quarterly Sales % Chg. 4%
5. 3-Year Sales Growth Rate 51%
6. Profit Margin 21.7%
7. Debt % 0%

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.

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.