Chapter 1 - Using IBD Price-Volume Charts



LEVEL 3 TRAINING: CHART READINGExtended sample of the outlineLESSON 1: Using IBD Price-Volume ChartsChapter 1 - Using IBD Price-Volume ChartsFinding stocks with great earnings growth and sizzling sales can give you the first clues about the market's next big winner.? But if you stop at these fundamentals, you're not getting the whole picture. Charts complete the view. These "Charting the Course" chapters will help you learn to read stock charts and to recognize buy points and sell signals.? It's the same method used by many professional investors, including IBD founder and market expert, William J. O'Neil.Charts may seem complex at first, but there's a reason so many successful investors use them: Stock charts give you a ring-side seat for watching the trades of big institutional investors.? And as you begin to learn about charts, you'll see?- it's easier than it might appear at first, and pretty soon, you'll be able to spot which stocks the big institutions are buying, and which ones they're unloading. Chapter 2 - The BasicsThe two main components in a chart are its price and its volume. HYPERLINK "" \o "Enlarge Picture" ?The vertical price bars show you the stock's price range for that day (on a daily chart) or for the week (on a weekly chart). The horizontal slash mark shows you the stock's closing price. If you're looking at the stock's action during the current trading day, the horizontal slash mark represents its latest price. Most successful investors use both daily and weekly charts. What's the reason for using both? Daily charts show the details of a stock's action and are helpful in pinpointing buy points and sell signals.? Weekly charts provide a useful summary and great perspective of the longer term, and can help you spot emerging trends.?? ?Watching a stock's price and volume action is the best way to zero in on institutional buying and selling.Large institutional investors -- not individuals -- account for the bulk of the trading in the stock market. When they decide to buy a stock, they will quietly buy shares over several days or weeks. And that buying will often show up in volume spikes on the stock's chart.On the flip side, when institutions decide to sell a stock, their unwinding of their position shows up as price declines on heavier volume.Moving Average LinesMost IBD? charts include moving average lines. These key benchmark lines plot a stock's average closing price over a set period of time. For instance, the 50-day moving average line tracks a stock's average closing price during the past 50 trading days. Its sibling, the 200-day moving average line plots a stock's average closing price over the past 200 trading days.? Both the 50- and 200-day lines appear on daily stock charts. ?10-week and 40-week moving average lines operate in a similar manner, tracking a stock's average closing price during the past 10 or 40 weeks. They appear on weekly price-volume charts. The 10-week line is roughly equivalent to the 50-day, while the 40-week and 200-day are roughly equal. IBD? Charts also contain a line showing the average daily or weekly volume. That helps you see whether the stock's volume is running heavier or lighter than usual.?? We'll discuss moving average lines - and the signals they send - in greater detail in Chapter 13.? Chapter 3 - Where to Find ItOften the most straightforward method is the most efficient way to get the job done. IBD? Charts at don't have a lot of bells and whistles. You won't find momentum indicators, Elliot waves or other fancy gauges on our stock charts. Instead, you'll find just the key information you need to make the best investing decisions. ?IBD has three different flavors of charts: the mini charts in the print edition of the newspaper, the IBD? Charts at and the Daily Graphs Online? Premium Stock Graphs.Mini Charts in IBD's Print Edition and eIBDMini charts accompany a number of features in the newspaper, such as the IBD? 100, Your Weekly Review, the IBD? Big Cap 20 and the NYSE and Nasdaq Stocks in the News columns. Can this chart be made easily printable if the reader clicks a "Print Me" link? In addition to showing a stock's weekly price and volume moves, these charts also contain other useful information to help you quickly size up a stock.? For instance, they include the company's quarterly earnings and sales track record, along with the date its next financial results are scheduled for release. Earnings releases often spark big stock-price moves, so mini charts help you easily see whether such a report is coming around the bend.?IBD? Charts at The basic charts at are free for subscribers of IBD? or .? They can be accessed by typing the stock's ticker into the quotes window in the top right corner of the Web site's main page. The stock's chart then appears about midway down the page in the resulting window. Graphic #8C10G8-Quotestool.pdfGraphic showing the quote area & resulting chart. Callout boxes pointing to the Quote tool where you type in the ticker symbol, the IBD? Chart. and the price volume info in the upper left corner. Callout box pointing to "Daily Weekly" with text "click here to toggle between daily and weekly charts.The red line in the chart is the stock's 50-day moving average and the black line is the 200-day moving average. To switch between daily and weekly versions of the stock chart, just click the Daily|Weekly link at the top of the chart.? Daily Graphs Online? Premium GraphsYou can also find Daily Graphs Online? Premium Stock Graphs at .? These graphs, which are available to Daily Graphs Online subscribers, contain a variety of useful information including the company's earnings and sales growth history, mutual fund ownership and other in-depth research information. In these charts, the stock's price, price change and volume level during the current trading session appear in the upper right corner of the screen. Right click on the price bars and you'll see the high, low and closing price and volume for each particular day. Roll the cursor over that display box and it will remain visible.In addition to the moving average lines, the charts also contain the Relative Strength line, which appears in blue. It offers an easy way to compare the stock's price performance with the S&P 500. The number that appears in blue near end of the Relative Strength line is the stock's Relative Price Strength Rating.These graphs include a variety of tools to let you store your own stock lists and export the data for further analysis. There are also Special Reports of stocks meeting select criteria, such as top EPS Rating or fastest-growing companies. You can make annotations on the charts to help you remember possible buy points or other key elements. The Daily Graphs Online Premium Graphs are among the most robust stock charting tools available to individual investors. Chapter 4 - Key PointsPrice-Volume ChartsPrice-volume stock charts let you time your buys and sells more accurately than if you simply find a stock with good earnings and high ratings and guess about when to buy. IBD? Charts help you spot the moves of big, institutional investors like mutual funds. The vertical bars in the chart plot a stock's price range for a day or a week. The short horizontal bar marks its last price. The bars running along the bottom of the chart show the stock's trading volume. Daily charts let you see the details of a stock's action, while weekly charts provide a useful summary that can help you spot emerging trends. Ideally you like to see volume rise when the stock's price rises and volume fall as the price declines. The mini charts in IBD's print edition and eIBD? show a stock's weekly price and volume moves. They're also packed full of other useful information on the stock's ratings, earnings history and industry group. The basic IBD? Charts available to subscribers at offer a no-frills, easy-to-read view of the stock's price and volume moves. Daily and weekly charts are available. Daily Graphs Online? Premium Stock Graphs contain a variety of information useful to CAN SLIM? investors, including company fundamentals, earnings and sales growth history and other in-depth research information. The service also has tools to let you store your own stock lists. Chapter 5 - Extras For ExpertsThe basic charts at and the Daily Graphs Online? Premium Stock Graphs also let you see price-volume charts for major stock indexes like the S&P 500 and for key IBD? indexes.? The data for the IBD? indexes is delayed one day because it's calculated using closing values.You can find the major indexes by clicking on the Markets tab at the top of the Daily Graphs Online? screen. HYPERLINK "" \o "Enlarge Picture" ?Another way to quickly pull up the charts of the major stock indexes is to enter the index's ticker code into the chart's ticker window.The graphic below contains the codes for the major stock indexes and for key IBD? Indexes.? IBD UniversityLESSON 2: Base Patterns – Part IChapter 1 - The BasicsBefore a stock can to launch a big price run up, it must have a solid base pattern to build upon. It's sort of like the foundation for a house: if it's not solid, the levels above can become unstable. For stocks, base patterns serve as that foundation. They occur when a stock's price falls and consolidates over a series of weeks or months. Bases typically form after a stock has already experienced a nice increase in its share price?-- also known as an uptrend --?of at least 30%.? That uptrend is important, because it shows you the stock has built up a record of price growth already, and has gotten support from some big professional investors. There are several kinds of bases that winning stocks frequently form prior to a big price run-up. Let's look at some of them. Cup-With-Handle BaseWhat do Cisco, Home Depot, Microsoft, Apple and Whole Foods have in common? They all soared to lofty heights after breaking out of a cup-with-handle base.Learning to recognize that pattern on a stock chart lets you buy in before the stock begins its big run.?? The cup-with-handle base is one of the easiest patterns to spot — and one of the most powerful. On a stock chart it resembles a teacup as seen from its side view.During the final stage of the base -- after the stock has climbed up the right side of the pattern -- it may pull back, etching a downward-sloping handle on its stock chart. You might wonder why a slipping price is a sign of strength. Here's why: This last downturn serves to shake out any investors who might be prone to selling. Often they're investors who bought into the stock before it fell into its correction. They held on through its downturn and now that it's climbed back to where it was, they're ready to sell.?Once those investors are gone, the stock faces less resistance as it breaks out of its base and heads higher. In other words, investors who held, and new investors who come in, all have more confidence in the stock, and are eager to invest more money. Hammering Out A BaseConsider Tractor Supply. Back in 2003, the chain store had carved out niche for itself as a one-stop shop for everything from hammers to lawn furniture to farm equipment. Its secret: staffing its stores with ranchers, welders and horsemen who had the background experience to help its rural customers find just the right tool or nail to get the project done.Its bottom line was booming.? The company had logged triple-digit earnings growth gains during the previous three quarters. Meanwhile its sales were up more than 40% during the same three-quarter period.If the stock popped up on your radar, knowing how to read its price-volume chart would help you buy at the optimal time. So let's take a look at its base. Tractor Supply scored some hefty share price gains in 2002, then fell into what would become a cup-with-handle base in December of that year. As it scaled the right side of that base in the spring of 2003, its share price briefly declined, forming a handle pattern.Then, in early June, its share price vaulted higher as its trading volume rose.? This action is known as a breakout. It occurs as a stock climbs past a point where it had previously run into resistance. Ideally volume will rise at least 50% above the average level as a stock breaks out of its base.? That shows you big, institutional investors are snatching up shares and helping to push its price higher.? A breakout from a base gives you an opportunity to buy a stock.? To calculate the buy point in a cup-with-handle base, add ten cents to the price at the top of the handle pattern. It's a little extra insurance about the breakout's power. In Tractor Supply's case, the handle's peak was at $46.21, so adding ten cents gave us a buy point of $46.31.? Although this is the stock's ideal buy point, you don't have to buy exactly at that price. Rather, you can buy a stock until it's up to 5% above its buy point.? In Tractor Supply's case, it was in buying range until its price hit $48.62.? Relative Strength LineAnother sign that Tractor Supply was a leader was its Relative Strength Line, which was also pushing into new high ground. The Relative Strength Line compares a stock's price action to that of the S&P 500. If the RS line is rising, the stock is outperforming the market. In Tractor Supply's case, the solid base and breakout, combined with the rising RS line were good signs. By the end of 2003, the stock had nearly doubled in price. Chapter 2 - Characteristics of A Sound Cup-With-Handle BaseNow that you've learned to spot a cup-with-handle base, here are some traits to look for to help you find a powerful one:? The cup-with-handle pattern forms after the stock has experienced a run-up in price -- also called a prior uptrend -- of at least 30%. The base lasts at least seven weeks. Shorter patterns probably aren't true bases. Start counting the first week the stock's price closes lower, after reaching a new closing high. Seven weeks gives the stock enough time to digest its previous gains, and to shake out investors who aren't inclined to hold or buy more shares. Though some cup-with-handles can develop over a year or longer, most take three to six months. Be sure to include the handle when you measure the length of the base.The base usually corrects 15% to 35%. That's because you want to see just enough sellers exit the stock -- and 15% to 35% is a healthy decline within a base, A deeper decline decreases the stock's chance of climbing back out of the base successfully. Calculate the percentage decline in a base from the price at the peak when the pattern starts to the lowest point in the correction. The base may be deeper if it forms during a bear market. In that case a typical growth stock will fall 1 1/2 to 2 1/2 times as much as the major indexes, such as the S&P 500 or the Nasdaq. Bases that are shallower than 15% are probably flat bases. They'll be discussed in Chapter 12. Stocks that form bases that are excessively deep are more likely to fail when they try to break out of that chart pattern and head higher.? The cup portion of the cup-with-handle base should have a smooth, U-shaped pattern. Jagged formations or those with a sharp V-shape are weaker. The handle portion of a cup-with-handle base is formed when a stock pulls back in price?-- generally 10% to 15%. It lasts at least five trading days, during which time the stock's price should drift lower as volume dries up. Light volume in the handle means only a few sellers are taking profits. You don't want to see a major selloff at this time. The ideal buy point is calculated by adding ten cents to the highest point in the handle.The handle should form in the top half of the base. If the handle forms too low in the base, the stock will have too much price resistance to overcome as it tries to rally higher. HYPERLINK "" \o "Enlarge Picture" ?To determine if the handle is in the top half of the base. Add the share price at the top and bottom of the handle together, then divide by 2. This gives you the midpoint of the handle. Next, add the stock's price at the top and bottom of the cup portion of the base together, then divide by 2.? This gives you the midpoint of the base. If the midpoint of the handle is higher than the midpoint of the base, the handle has formed in the top half of the base.Count the number of weeks the stock rose in above-average volume. Then compare it with the number of weeks the stock dropped in above-average volume. There should be more up weeks than down weeks as it forms its base. That shows that more institutional investors were buying shares than were selling??-- a positive sign. Possible Flaws In A Cup-With-Handle BaseNot all bases are created equal.? Some have flaws. Think of them as warning signs.? They increase the likelihood that the stock may stumble when it tries to break out of its base. Stocks that race straight up from the bottom of a base into new high ground? -- they've climbed too far too fast and often have a hard time holding onto gains. Stocks that experience wide and loose price swings as they form their bases?-- with the highs and lows for the day or week far from each other. Erratic price moves are never a good sign. That's a sign that big investors can't decide whether to buy or sell. Instead, you'd like to see tight trade with narrow price swings. Handles with lows that inch upward. This is called "wedging" and often leads to breakouts that fail. Wedging handles are a sign that not enough “weak holders” have sold yet. If they sell later, a breakout could fall apart. Handles that form below the midpoint of the base.? Stocks that break out from such low handles still face resistance as they try to climb higher. Chapter 3 - Where To Find ItThe print and online editions of IBD? discuss bases and other key chart patterns in greater detail and can help you hone your base-spotting skills.The Investor's Corner column --? as well as a number of other features in the newspaper's Investor Education section -- regularly discusses base patterns. The articles are also available free at in the Web site's News & Analysis section, which is located near the top of the homepage. The Daily Stock Analysis feature at walks readers through stocks forming bases and helps interpret their stock charts. The feature is particularly useful because it focuses on a stock's recent price and volume swings and can help you zero in on what's currently working in the market. ?Looking for an investment candidate?? The newspaper's Base Reader column focuses on promising stocks currently forming base patterns.? It discusses their pros and cons and can help you interpret the signs the stock's chart is flashing. It also points out possible buy points, so you'll know when to buy in. Another place to hunt for institutional-quality stocks is the newspaper's Stocks Just Out Of Bases and Stocks In Bases tables, which runs daily with IBD's NYSE & Nasdaq Research Tables. The tables -- which you won't find in other print or Web publications -- provide a quick way to zero in on stocks poised to climb higher. HYPERLINK "" \o "Enlarge Picture" ?The first table -- Stocks Just Out Of Bases -- looks for companies that have just emerged from consolidations. The second table -- Stocks In Bases -- looks for companies that have been consolidating for at least five weeks.Both lists are computer-generated and focus on stocks with solid earnings and sales growth histories. Chapter 4 - Key PointsBase PatternsA base pattern occurs when a stock's price falls and consolidates over a series of weeks or months. Bases typically form after a prior price uptrend of at least 30%. The base serves as the foundation for the stock's later climb - sort of like the foundation of a house. If it's not solid, it can make any levels built above it unstable. A cup-with-handle base is one of the most powerful base patterns. Base shape: resembles a teacup as seen from its side view. Base length: lasts at least seven weeks. Base depth: usually 15% to 35% but may be deeper if it forms during a bear market. Base characteristics: cup preferably has a smooth “U" shape rather than a sharp “V" shape. Buy Point calculation: ten cents above the peak in the handle. Handle characteristics: Length: five days or more Depth: generally 10% to 15% Should drift downward as volume dries up. Should form in the upper half of the base.Potential flaws in a base. Racing straight up from the bottom of the base to new highs. Wide and loose price swings. Wedging as the handle forms. Handles that form below the midpoint of the base.Chapter 5 - Extras For ExpertsSpotting base patterns on price-volume charts is nothing new. Savvy investors have used the technique for decades to help determine the best time to buy?- and to sell?- a stock. And the same sorts of base patterns show up year after year. For instance, back in 1934 at soda shops across the country, sales of Coca-Cola were booming. Though the U.S. was in the grips of the Great Depression, the company's sales had increased steadily in recent years. And Coca-Cola was becoming a bestseller in Europe and expanding its operations into 76 foreign countries.Meanwhile, shares of Coca-Cola had been carving out a cup-with-handle base pattern.? As investors began to recognize the success the company was having, demand for its shares began to rise.? In early April 1934, the stock broke out of its base as volume surged higher. Coca-Cola would go on to climb 420% over the next three years. HYPERLINK "" \o "Enlarge Picture" ? LESSON 2: Base Patterns – Part IChapter 1 - The BasicsThough the cup-with-handle base is the most common pattern, there are four other types of bases to be on the lookout for:? Flat base Double-bottom base Saucer base Ascending base This chapter will help you learn to recognize each of these trading patterns and determine the proper buy points. Flat BaseFlat base patterns often form quietly, but the gains they launch can be explosive. These chart patterns frequently take shape when the broader market isn't making much upward progress.?? Flat bases tend to be shallow -- no deeper than 15% from top to bottom.? And they can form in as little as five weeks, rather than the usual seven weeks required for other types of bases.?? Flat bases sometimes occur after a stock rushes up from a previous base, then stalls. As its price moves in a narrow sideways range, its base looks rather flat on a stock chart.? In many cases, the stock is simply taking a break as it consolidates its gains and prepares to head higher.? Think of it as a time when the stock is building up steam to propel its future takeoff.?? To calculate the buy point of a flat base, add ten cents to the peak, which is usually on the base's left side.? That 10 cents is just added assurance that the stock has enough emerging strength to decisively rally above its earlier price high.For example, this chart shows the flat base Wabtec formed during an 11-week period in the winter of 2005. At the time, the Pennsylvania-based maker of rail and freight equipment had recently renewed its license agreements with Japan's Nabtesco and Mitsubishi Electric Corp., marking the 80th year of their partnership. The two Japanese firms were the sole suppliers of braking equipment in that country's railway market. They also served China, Taiwan and other Asian markets. ?Its earnings growth rate had been in the 50%-plus range for the past six quarters. And its pretax margins had risen sharply in recent years. The stock cleared a seven-month base in June 2005, and then scaled the charts.? In mid-November 2005 it paused and fell into what would become a flat base. It spent nearly three months carving out that chart pattern, and then broke out of the flat base on Jan. 24, 2006.? Its volume swelled nearly 90% above average that day as it made its big move.?? This was the time to buy. As we discussed earlier, to figure out the best price to buy, you would have added 10 cents to peak of the left side of the base, at $28.98.? That gives you an ideal buy point of $29.08.End of the extended sample of the outline ................
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