Level 3 Training: Chart Reading

LEVEL 3 TRAINING: CHART READING

Extended sample of the outline

LESSON 1: Using IBD Price-Volume Charts

Chapter 1 - Using IBD Price-Volume Charts

Finding 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 Basics

The two main components in a chart are its price and its volume.

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 Lines

Most 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 It

Often the most straightforward method is the most efficient way to get the job done. IBD® Charts at Investors.com 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 Investors.com and the Daily Graphs Online® Premium Stock Graphs.

Mini Charts in IBD's Print Edition and eIBD

Mini 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 Investors.com

The basic charts at Investors.com are free for subscribers of IBD® or Investors.com. 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 #8
C10G8-Quotestool.pdf
Graphic 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 Graphs

You can also find Daily Graphs Online® Premium Stock Graphs at Investors.com. 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 Points

Price-Volume Charts

• Price-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 Investors.com 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 Experts

• The basic charts at Investors.com 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.

• 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 University

LESSON 2: Base Patterns – Part I

Chapter 1 - The Basics

Before 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 Base

What 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 Base

Consider 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 Line
Another 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 Base

Now 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.

• 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 Base