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 consecutive 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 professional 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 percent 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.
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 precise buy point, you are buying late and will more than likely get caught in the next price correction. Your automatic 8% loss-cutting rule 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 correction. 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 symptom. 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 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 311⁄2 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 usually 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 cup with handles just like
these past winners.
The Value of Market Corrections
Since 80% to 90% percent of price patterns are created during periods of
market corrections, you should never get discouraged and give up on the
stock market’s potential during intermediate-term sell-offs or short or pro-
longed 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.
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.
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 consecutive 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 professional 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 percent 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.
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 precise buy point, you are buying late and will more than likely get caught in the next price correction. Your automatic 8% loss-cutting rule 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 correction. 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 symptom. 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 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 311⁄2 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 usually 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 cup with handles just like
these past winners.
The Value of Market Corrections
Since 80% to 90% percent of price patterns are created during periods of
market corrections, you should never get discouraged and give up on the
stock market’s potential during intermediate-term sell-offs or short or pro-
longed 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.
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.
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