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Historical Chart Analysis of Past

WinnersBy Steve Power

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Analysis Techniques

• Marketsmith Historical charts to look at former leaders• IBD Rules to look for buy/sell points on these charts• Buy points will be traditional bases

• Cup w/ handle, Cup, Flat Base, Double Bottom, Double Bottom with Handle, Ascending Base, High tight flag, etc. •Add points will be 50 day MA, or 3 weeks tight

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Analysis TechniquesSell Rules• 7% Stop loss on all entries

“Always, without Exception, Limit Losses to 7% or 8% of your cost”

- How to Make Money in Stocks, p. 242• “ Low Volume and Other Weak Action” p. 268•“Breaking Support” p 269

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Let’s get startedLooking for a proper base or buy point

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Stock to ReviewEBAY

Chosen form O’Neil’s book, “How to Make Money in Stocks”

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Would you buy this base?

Assume this stock has all the fundamentals in CANSLIM, would you buy this stock?

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Follow Through

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Lets take a closer look

Assume this stock has all the fundamentals in CANSLIM, would you buy this stock?

Positives• Confirmed Uptrend• Uptrending RS• Resembles Cup with Handle

Negatives• V-shaped• 3 biggest down weeks are red,•Heavy Volume in Handle• 44% Deep• No tightness in base or handle

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Result?Don’t Buy

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Base Was Faulty Breakout from faulty base results in failure

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Stock sets up again Positives•Base is tightening up, action less wide and loose•Base is not as deep• Red weeks are drying up on right side, blue weeks are way above average, stock is under accumulation • RS is rising to new highs•11 Up weeks on heavy volumeNegatives • 33% Deep (with 35% threshold) but still on the deeper side•3 red weeks on above average volume

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Falls back into BaseWhy did it fail?

Market was still in a bear, both failures coincide with new legs down

Note Mid- Week closes

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Continue Monitoring Stock

3rd Set Up is a 16 wk Double Bottom• A base this low in the pattern is acceptable in a bear market, especially given the RS• Red weeks are showing support action• Base is tighter, 21% deep• Tight closes in base• O’Neil Buy Point is out of this double bottom

Note Rising

RS

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What is the market doing this time?

• Breakout is occuring while

market is 9 days into a successful follow through

with only 3 distribution days, so you should be looking for buy

candidates such as this

4th day Follow Through, up

5.1%

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Daily Chart

Buy Point = 62.09

•Volume Up 71% on Breakout

day

FTD

Stop Loss =

57.75(7%)

•Volume Up 71% on Breakout

day

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After Breakout• Drops about 2.5% below buy point, but never violates stop-loss

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Post-Breakout• Up only 13% from breakout after 11 weeks, not a rocket stock out of the gate, at first glance

•Rising RS tells story about condition of stock vs. the market

• New buy point off 50 day support, also a flat base, or base on base• Also note flat base is part of a large cup with handle, also constructive action• No reason to sell yet, hasn’t hit a 20-25% profit target, and it hasn’t hit any sell rules

No selling

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• Clean breakout to new highs on 137% increase in volume

62.09

68

70.95

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2nd Pullback to 10 Week M.A.• 2nd Pullback to 10 Week/50 day MA• Note RS Line Racing to new highs

Volume Dry Up

3 Tight Closes

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Indexes Tell the Story

•Stock is marching higher out of sound bases in spite of weak market action, hence rising RS line•S&P500 actually made new lows• If market turns to upside, stock could really take off•Would you have held on? Stock never violated any key support levels or moving averages, never flashed a sell signal , could have held

FTD

2 month downtrend

Up 11%, Nasdaq down 16%

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New Bull ConfirmedFTD

FTD

• Note

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Stock Launches• Once weight of market is removed, stock takes off

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Buy Points on the Way Up

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4321

1. Double Bottom2. 50 Day Pullback3 Flat Base4 50 Day Pullback5. 4 weeks tight

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Daily Chart

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•2nd pullback to 10 week/ 50 day MA, gets with 3%• Stock is now up 65% from original breakout, and 50% from flat base, so add is more risky• Rules state its okay to add though and volume looks acceptable on pullback

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When to Sell?

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How to Make Money in Stocks Willam J. O’NeilPage 268-271

1) Take profits at 20-25% unless stock is up that much in <3wks

2) New Highs on Low Volume 3) Closing at or Near the Day’s Price Low

4) 3rd or 4Th Stage bases5) Signs of a Poor Rally

6) Great one day price drop7) Long Term Uptrend is broke

Others are discussed in book as well

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Possible Sell Points• First place to sell could have been at

20-25% profits

• 2nd Place to Sell could have been at

heavy volume reversal and gap

down, stock was up 90% from initial

breakout, look for places to take some

profits

•3rd place may have been at break of 50MA(long term support) during

uptrend• 4th - Long term

holders may wait for a 2nd stage base to form and sell down

the road

25% gain from B/B

Stock up 90%

Exhaustion Gap/Reversal

Support Breached

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If sold at 50 day MA breach

50 day MA breach around 104

Buypoint 1. Double Bottom 62.09=68%2. 50 day MA = 68.00 = 53%3. Flat Base = 70.85 = 46%4. 50 day MA = 41%5. 4 weeks tight = 13%6. 50 day MA = 7%

The key is to have a selling plan long before its time to sell, so that when you sell rule occurs, you act on it and don’t think about it or hesitate.

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Selling Varies by Personalities

Some may decide to wait for a 2nd stage base to form is stock acts alright, and hold on for a longer gain.

• Stock only broke out of 1st stage•1st Year of new bull market after 2 year bear•May have some room to run yet

For longer term holds, Bill says sell when the stock lives below 10 week, or can’t rally above it for 8-9 weeks

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Where did Ebay Go?• 282% in 115 weeks•Formed 2 more bases, before topping• Again, up to preference to take profits during each run, and re-buy each base, or to hold through major corrections and base formations•Decide in advance, and realize you are only afforded that decision if you pick a leader and you buy early in a bull market

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How did EBAY Finally Top?

• 3rd stage base breakout with successful run, but weekly volume is not present during final advance• Massive gap down on huge volume seals the deal, but stock is off 30% from its high when it finally gaps down

Weak Volume

Massive Gap Down

Biggest Volume of Advance