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Chart Patterns

Base Counting Notes

● First, use weekly IBD Charts. They provide about two years of price data, making it easier to find each base in the
stock’s major advance.
● Second, don’t count a base if it forms well below $10 a share. Low priced issues are usually avoided by
institutions.
● Third, Many stocks will form bases while their fundamentals are soft. Generally you don't count these bases until
the first one that forms when earnings and sales growth start running at least 25% on a quarterly basis.
● Fourth, a valid base needs a prior uptrend of 20% to 30%or more.
● Base Count can be reset with:
○ Bear market
○ Stocks start fresh base count when they correct severely enough to undercut the low point in their last
base pattern.
○ When they base for longer than 1.5 - 2 years
○ With a 66% decline in the price of a stock.
● Always start counting bases with the first week the stock closes lower. The first down week may occur just before
the ultimate high in the base.
● Occasionally, a stock makes a new high during its base building period, yet it is not a breakout. In these cases,
the stock is probably just continuing to work on its base, waiting for a sound breakout.
● The end of a base is determined by the week the stock breaks out.
● Stocks that break out of 3rd, 4th and 5th stage bases are much more prone to failure
● Base on Base
○ Occurs when the stock breaks out of a base but is unable to rise more than 20%
○ The 20% rise is measured from the spot the stock breaks out of the first base to the high in the second
base.
 If the first base is a cup, then the high on the left side of the first cup is where we measure the
beginning of the 20%.
 If we break out of a cup with handle then the pivot point in the handle will be used as the spot to
measure the 20% advance.
○ The stock then builds another base as the market continues sliding.
○ When the markets weakness ends, the stock is likely to be among the first stocks to race into new price
high
○ If the a base forms no more than 20% higher than the first base then both bases can be counted as one
base
○ If you have a base on base on base, the last base must not be more than 20% higher than the first base
to count as one base structure.
○ The pivot point is when it move above the high of the 2nd base
○ Look for RS line at new high
○ Look for GAP up as price moves past pivot
● Base Within a Base
○ Sometimes obvious chart pattern is not the most relevant or useful. Don't miss the trees through the
forest.
○ The smaller more recent pattern will tend to be clearer and tighter then the big base formation,
○ The more distance from breakout to other resistance the better.
○ True test happens later when you can compare the price and volume action of the breakout from the
smaller base to the breakout from the larger base.
○ Base could be Double Bottom, Cup (w/ or without handle), Saucer (w/ or without handle), or Flat.
● Bear Market Notes
○ Bases can be 40-50% deep and still work with Bear market declines of 40% or more
○ Handles can be 20-30% deep with Bear market declines of 40% or more and still be acceptable
○ Beware of stocks that correct more than 60%

Base Counting Checklist

● Base Stage?
● 30% Prior Uptrend?
● Substantial Increase in trading volume at some points in the prior uptrend?
● Best choices are stocks that deteriorate the least during intermediate market declines.
● Maximum Depth of 30-35%, 40-50% OK during Bear Market.
● Look for “Volume Dry Up” at the bottom of base? This means all selling has been exhausted and there is
very little stock coming into the marketplace.
● Weeks of very heavy advancing volume, followed by other weeks with extreme volume dry up are very
constructive.
● No wedging?
● What type of base and is it long enough?
○ Cup/Saucer without handle 6-65. Prefer 7-8 Weeks or longer.
○ Cup/Saucer with handle 7-65 weeks or longer. Prefer 7-8 Weeks or longer.
○ IPO Base 3-4 week cup minimum
○ Double Bottom with or without handle 7 -65 weeks or longer
○ Flat 5-6 week minimum
○ Square Box 4-7 week minimum
○ Ascending 9-16 weeks
○ High Tight Flag. Flagpole 4-8 weeks, Flag 3-4 weeks, total of 7-12 weeks
● Handle Characteristics
○ Length - at least 1 week to as long as weeks or months. Must be at least 5 trading sessions.
○ Depth - preferably 5-10%, can be up to 15%, at end of bear market can be as much as 20-30%.
○ Should drift downward with volume drying up
○ Should have relatively tight price action
○ Midpoint of the handle should be above the midpoint of the base.
○ Preferably the handle should start within 15% of the previous High
○ Should form above 200 day moving average
○ The Pivot point is the high of the handle. Most occur at 5-10% below the prior peak.
○ Wedging - A handle that drifts upward along its price lows is bad news
○ There should not be wild price action in a handle
○ At Breakout the daily (and weekly) volume should be 25-50% higher than the 50 Day Average,
sometimes this volume takes a few days to develop
● Elements of Strength
○ Gap ups on solid volume?
○ Relative Strength Line at new highs at or before breakout. RS Rating above 80 at pivot
○ More accumulation than distribution weeks in right side of base. Preferable whole base
○ Large volume on most up days/weeks closing in upper range
○ Light volume on most down days/weeks
○ Many days/weeks closing near top of range
○ Big Daily or Weekly volume spikes. Weeks of heavy volume followed by other weeks of extreme volume
dry ups are also a very constructive sign.
○ ACC/DIS RTG® at "C"or higher at the pivot point
○ Overwhelming demand at pivot point
 Volume 25-50% above average. Sometimes volume will show soon after breakout. Not
uncommon for volume to show spikes of 200% - 1000%.
 Weekly Volume Higher than prior weeks
● Elements of Support?
○ Overall appearance of tight and constructive rather than wide and loose
○ Tight areas (3+ consecutive weeks closing almost unchanged). Small price variations from high to low of
the week, with several consecutive weeks prices closing unchanged or remarkably near the previous
weeks close. If the pattern has a wide spread between the weeks highs and lows pints, it's been
constantly in the market's eye and frequently will not succeed when it breaks out.
○ 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 or last few weeks of the handle. This means that all selling has been exhausted and
there is very little stock coming into the marketplace. The combination of tightness in prices with dry up in
volume is generally quite constructive.
○ Support at moving averages

Midpoint Calculation

● High of base + Low of base / 2 = Midpoint of base


● High of handle + Low of handle / 2 = Midpoint of handle
● Midpoint of handle should be higher than midpoint of base
Primary Chart Pattern
Cup With Handle

● Shape looks like a tea-cup when viewed from the side. Should be rounded and give the appearance of
U rather than narrow V. This characteristic allows the stock time to proceed through a needed natural
correction, with 2 or 3 little final weak spells around the lows of the cup. This is important because it
scares out the remaining weak holders and takes other speculators attention away from the stock. A
more solid foundation of owners who are more less apt to sell during the next advance is thereby
established. Stocks that come straight off the bottom can be more risky because they have no
pullbacks.
● Base Length - 7 - 65 weeks or even longer. Most are 3-6 months.
● Depth in base usually 12%-15% (no more than 33%) in normal markets. A very small number can be
as deep as 40-50% in severe bear markets. Some will work even if they correct 2 to 2.5 times the
markets average declines. In cases of extreme decline the severity of the general market decline and
the extent of the stocks prior run up must be taken into account. Stocks that drop as much as 50% or
more tend to fail 5-15% beyond their price breakouts.
● Right side of base should show more up than down weeks in above volume trade
● Desirable for entire base to have more up than down weeks in above average trade
● Handle Characteristics
○ Length - at least 1 week
○ Depth - preferably 8-12%, can be up to 12%-15%, at end of bear market can be as much as 20-
30%
○ Should drift downward with volume drying up
○ Midpoint of the handle should be above the midpoint of the base.
○ Usually start within 5-10% of previous High, handles are more prone to failure if they correct
over 15%.
○ Should form above 200 day moving average
○ Pivot point - high of the handle
○ Wedging - A handle that drifts upward along its price lows is bad news
● Buy point is Pivot plus 10 cents on volume that is 50% higher than avg.
Primary Chart Pattern
Cup-without-Handle

● Base characteristics - preferably "U" Shaped cup rather than "V" shaped
● Shape is similar to Cup-with-Handle, but with no handle
● Base Length - 6 weeks to a year or more. (BD Investors Corner 4/12/2011)
● IPO Base 4 week cup IS OK
● Depth in base - 20%-30%, as deep as 50% in severe bear markets
● Pivot point - left side high
● Can have higher failure rate than cup with handle at the end of Bull Markets
○ More rare during some cycles
○ More likely to be successful at the beginning of a new bull market
○ Occur more often in small or midcap stocks
○ Because they can be more risky it is a good idea to confirm
 Strong Earnings
 Good Sponsorship
● Double check to see that RS line at new high
● Good if this happens on a GAP up. Look at daily chart.
Primary Chart Pattern
Saucer-with-Handle

● Shape similar to Cup-with-Handle but more shallow and usually longer


● Base Length - 7 weeks to a year or more
● Correction in base more shallow - usually only 12%-25% from peak
● Handle Characteristics
○ Length - at least 1 week
○ Depth - preferably 8-12%, can be up to 12%-15%, at end of bear market can be as much as 20-
30%
○ Should drift downward with volume drying up
○ Midpoint of the handle should be above the midpoint of the base.
○ Preferably starting within 15% of previous High
○ Should form above 200 day moving average
○ Pivot point - high of the handle
○ Wedging - A handle that drifts upward along its price lows is bad news
○ Buy point is Pivot plus 10 cents on volume that is 50% higher than avg.
Primary Chart Pattern
Double Bottom Base

● Shape is similar to the letter "W"


● Base Length - usually 7 weeks to a year or more
● Correction in base - movements in price sharper and tends to be more severe than "Cup and Saucer
with Handle"
● Typically not more than 35%, but still usually corrects no more than 50% from the peak in a bear
market
● Left side of base you prefer to see 4 or 5 weeks, especially if on the heels of a sharp move up or as a
later stage base. There should be at least 3 Weeks down to the first bottom then 1-2 up to the middle
of the W.
● Midpoint in middle of W should be below the high point in the overall base pattern
● Base characteristics - usually second bottom should slightly undercut the first bottom. Preferably by a
few points. This scares out weaker holders with new lows
● Stock rallies off low quickly as big money rushes in to drive up stock
● Pivot point in base is middle of W, if no handle
Primary Chart Pattern
Flat Base

● Usually begins after a stock breaks out of a cup, saucer, or double bottom then runs up more than 20%.
● One of most bullish patterns
● To be a strong technical pattern the stock graph should show a good prior price uptrend, coming off a
cup with handle or a saucer with handle or a double bottom. The price should run up 20% from one of
these patterns. Then instead of selling off deeply and forming a cup, it will move sideways in a fairly
tight price range for at least 5 weeks. The longer the better.
○ Hallmark of these is tight trading
○ Volume should be low, as if the stock is setting up while nobody is paying any attention.
○ Typically not a first stage base. Often 2nd or 3rd stage base after breaking out of a cup with
handle or a double bottom (meaning they form after a stock breaks out above a base and climbs
at least 20% or more)
○ Area of consolidation around which a rectangle can easily be drawn
○ Sometimes say that stock is letting it's 50 day average catch up.
○ Usually a well defined floor, or support, where price lows seem to hold and bounce from.
○ On the flip side there;s a ceiling or resistance level where price highs will touch then back off.
● Base Length is usually 5 weeks or more (up to 13) weeks the shortest of major pattern
○ start counting with first week that shows a "weekly closing loss" at beginning of pattern.
● Correction in base is usually less than 10-15%, from highs
● Buy point usually left side peak, can often be the highest peak within the base. It can also turn up at
lower levels within the base, when a significant resistance level exists. sometimes tricky to plot buy
point. In rare cases the buy point can occur in the week prior to the breakout. There may be an
identifiable handle that can offer a lOwer buy point.
● Stock can remain in base if it makes a "new weekly high" but does not make a new "weekly closing
high."
● Did the stock show a dry-up in volume within the base, especially in the down weeks in price?
● Were there any positive reversals in the base?
● Are there gap-downs in the base? Even a shallow base can exhibit volatile action.
Primary Chart Pattern
SQUARE BOX

● After moving up from a cup with handle or double bottom, this formation typically lasts from 4-7 weeks.
● Sideways action is preferred to an upward or downward tilt. (IBD Inv Corner 4/13/2011)
● Doesn't correct too much (usually 10-15%).
● Pattern has a square boxy look.
● Volume should dry up in base just like Flat Base.
● Proper Buy Point is Highest point in base plus 10 cents
Primary Chart Pattern
High Tight Flag

● Rare Chart Pattern, but considered a valid bullish base formation


● Usually occurs when a lesser known company suddenly has a important new product that is driving a
rapid dramatic increase in earnings, as much as 100 to 500%
● Use caution with this pattern as is very risky and difficult to interpret properly
● Shape has 2 parts: a "flagpole" (rapid advance) and a "flag" (shallow correction at the top)
● Flagpole
○ Stock usually doubles in price (100 to 120%)
○ Length is typically 4 to 8 weeks
● Flag
○ Corrects no more than 10-25%
○ Length is usually 3-5 weeks?
● Pivot Point - breakout through peak or highest point of the flagpole
Primary Chart Pattern
Shakeout + 3

○ This pattern -- a cousin of the double bottom -- happens once in a blue moon. But if you spot it,
you may get a head start on a winner. O’Neil technique learned from Jessie Livermore.
○ Alert investors can use the plus-three approach to chart a more aggressive buy point, rather
than waiting for the normal buy point 14 a double bottom: a dime above the middle of the "W."
○ In a shakeout-plus-three, find the low of the first bottom. After the stock makes its second
bottom, undercutting the first, watch how the stock acts once it's 3 points above the first bottom.
If it rises in strong volume at that level, you can go ahead and buy right then and there.
○ There are two different methods used to calculate the specific buy point on a shakeout plus 3.
 The original method was to add $3 to the first leg down for stocks between $30-60. This
is a more aggressive buy point than the one I will normally operate with. This buy point
should be reserved for monster stocks. Use +13% to +14% for other ranges
 The newer method for the shake out + $3, will be used on stocks priced from $20-$30.
Use +13% to +14% for other ranges.
○ Wait for Double Bottom buy point to initiate B2.
○ Can be used in conjunction with pocket pivot.
Primary Chart Pattern
Ascending Base

● Ascending bases are easy to miss. And they're rare. But it could pay handsomely to find one, as they
are among the most powerful signals a stock can offer.
● Normally, the pattern tells the story of a stock that is trying to climb, and would indeed be rising if not for
a stuttering or correcting stock market.
● Usually happens when the market is, moving sideways, down trending, or choppy. The stock will
attempt to move higher while the market remains weak. When the market finally turns around and
becomes bullish the stock shoots much higher. Often formed when a strong stock resists general
market weakness.
● Occurs midway along a move, after a stock has broken out of a cup with handle or double bottom base.
● Shape has 3 pullbacks ranging from 10-20% with each high point higher and a each low point higher,
as well. Pattern still shows an overall uptrend
● Base Length is typically 9-16 weeks
● Correction in base for each pullback is 10%-20% from previous peak
● Pivot point is breakout above left side high of 3rd pullback
Pocket Pivot
1. Usually occur before the breakout: can occur as stock moves higher out of base
2. Price and volume action and base formation are critical
3. Pocket pivots are signs of strength: limit to fundamentally strong stocks with constructive basing
action: avoid wide/loose patterns
4. Make sure the averages are constructive also
5. Prices should be tightening, becoming quiet, and volume declining: price should be respecting the
50 sma or 10 sma
6. Only buy pocket pivots above the 50 sma
7. When pivot occurs, up volume should be equal or greater than largest down volume in past 10 days
8. If pocket pivot day coincides with breakout day, volume does not have to be at least as great as
biggest down volume day of past 10 days: but should be acceptable breakout day volume
9. Do not buy pocket pivots if the overall chart formation is in a multi-month downtrend (5 months or
longer). It is best to wait for the rounding part of the base to form before buying.
10. Some of strongest stocks may only rest long enough to hit their 10 DMA. So this is great
opportunity to get on board if you missed initial buy
11. Sometimes get pocket pivots just before earnings announcement: a lot of times this is indicative of
a leak: once you are sure that the volume criteria is met, go ahead and take a position ahead of the
announcement
12. Can get pivots as stocks bounce off 50 DMA: this is low risk entry point
13. Also can see pocket pivots from hot IPOs that otherwise don’t really look buyable: a lot of times get
these bouncing off 10 sma: this has changed their approach to IPOs because don’t have to wait for
high, tight flag anymore
14. Bottom fishing : after big decline, be alert to pocket pivots in the rounding bottoms
15. Continuation pivots: stock has broken out, in an uptrend, wait for pullbacks to 10 sma and look for
pivots there.
16. Improper setups:
 Do not buy pocket pivots if the stock is under a critical moving average such as the 50dma or
200dma. If well under its 50dma, and getting support near the 200dma, it can be bought
provided the base is constructive.
 When stock takes quick dip and V recovery, lot of times the pivot fails: stock needs more time to
consolidate gains
 Avoid buying pocket pivots that occur after wedging patterns.
 When pivot occurs above the 10 sma, usually the starting point too high
 Do not buy pocket pivots if the stock formed a 'V' where it sells off hard down through the
10dma or 50dma then shoots straight back up in a 'V' formation. Such formations are failure
prone.
 Never buy a pivot in a downtrend
Secondary Chart Pattern
Three Weeks Tight

1. The three-weeks-tight is a secondary pattern. It's often a way to add shares when a stock you bought
earlier in a proper breakout is working. Like a pullback to the 10-week moving average, this chart
pattern provides an add-on buy opportunity in stocks that have already broken out of bases. Therefore,
you should buy a smaller amount of shares in order to prevent your average cost from rising too fast.
2. This follow-on pattern is among the shortest in terms of time period to produce a buy point.
3. It needs at least three full weeks. Each Friday close must generally be within 1% of the prior week's
close. The pattern can extend to four weeks. Beyond four weeks, it would probably be called a flat
base, although the buy point would typically be determined the same way: 10 cents above the highest
intraday price reached within the pattern..
4. The three-weeks-tight pattern involves three weekly closes each within roughly 1% of the adjacent
week. The buy point is the high of the pattern, plus 10 cents. Generally, the trading range is tight and
the volume is quiet. The pattern points to institutional support.
5. A three-weeks-tight shows a stock stubbornly holding onto its gains. It suggests a stock is not only
defending its recent gain but is impatient to move ahead to new highs.
6. In the first three months of 2011, IBD identified 28 three-weeks-tight patterns. Of the 28, nine led to
successful breakouts, 12 failed after clearing the buy point, and seven never cleared the buy point.
a. Don't buy before a breakout: Some investors think they can get a head start by buying a
stock as soon as it forms a three-weeks-tight pattern. But the stock has to clear the buy
point in strong volume to validate the pattern. Of the seven stocks that never cleared the buy
point, five rolled over and declined 9% to 33%. One declined to the 50-day moving average,
providing a different kind of secondary entry. The other stock moved sideways, etching a flat
base, which eventually led to a successful breakout.
b. Don't buy if volume is subpar: Three of the 28 three-weeks-tights cleared the buy point in
volume that wasn't 40% above average — the minimum for a valid breakout. All three failed.
c. Be wary of thin stocks: Many disciplined investors will avoid buying thin stocks. Others will
limit them to a small part of their portfolio. Seven thinly traded three-weeks-tights broke out.
Four worked, and three failed.
d. Don't buy during a correction: The general market should be in a confirmed uptrend.
Stocks can be bought with an uptrend under pressure, but this is riskier than an
unencumbered uptrend.
Secondary Chart Pattern
SHORT STROKE

● The short stroke is a rare, but potentially powerful pattern. It's a close cousin to the 3-weeks tight formation, but
shorter: it only takes 2 weeks to form. On a chart, it looks like the stroke of a pen, so that's where it gets its name.
● The short stroke pattern begins with a big one-week surge.
● In the second week of a short stroke pattern, trading should be tight.
● In a proper short stroke pattern, volume in the second week will be lighter than the first week.
● To calculate the buy point, add ten cents to the peak within the short stroke.
Other Secondary Buy Points
1. Soft correction and rebound from 50 day average. I have not followed this buy point correctly in the past.
Look at the volume on the left side of the base to determine whether there are any large red bars. Usually if there
are large red bars in above average volume, then this would not be a proper buy point. It may be OK to exclude a
red bar that closes high in its range. The stocks volume intraday should exceed the 50 DMA, the Pocket Pivot
and the Highest volume down day on the left of the base. In addition to this the volume at the end of the day
should exceed each the 50 DMA, the Pocket Pivot and the Highest volume down day on the left of the base.
 Volume on the way up must be greater than the volume on the way down.
 A good guide is to look and see if there are any large red bars to the left.
 Compare cumulative volume to each of the below. Volume on the way up must be above the largest red
bar in the pattern. Also look at each of these to determine whether the entry is appropriate:
o intraday volume % change for the 50 DMA
o intraday volume % the Pocket Pivot.
o intraday volume % compared to the largest red bar in the current pattern

2. Regaining 50 Day Moving Average. The main difference between this and number 1 is that it is OK if there is
some very high volume to the left of this buy. The shakeout is the thing that is different between this and the soft
correction. The stocks volume intraday should exceed the 50 DMA, the Pocket Pivot and the Highest volume
down day on the left of the base. In addition to this the volume at the end of the day should exceed each the 50
DMA, the Pocket Pivot and the Highest volume down day on the left of the base.
 Volume on the way up must be greater than the volume on the way down.
 Compare cumulative volume to each of the below. Volume on the way up must be above the largest red
bar in the pattern. Also look at each of these to determine whether the entry is appropriate:
o intraday volume % change for the 50 DMA
o intraday volume % the Pocket Pivot.
o intraday volume % compared to the largest red bar in the current pattern

3. Sloping Pivot Line

4. 12 of 15 Days Up (then drifts sideways for a week or longer)

5. CONFLUENCE - Notice when 10,21, and 50 day averages come together.

6. MOMENTUM GAP - Can be used after a strongly performing stock has just broken out of a traditional base
pattern pattern. If the stock Gaps Up it is OK to buy with the idea that it should hold the low of the daily trading
range on the gap up day (not the low of the GAP).