Review of the Level 1 Material

Buy Low, Sell High vs Buy high and sell higher

· At or near the 52-week high

· Leading stocks in leading groups

· Proper base structures

· During a confirmed market uptrend

· Average price of a leader before its run? $32

Buy on the Dips vs Always buy on the way up and never buy on the way down

· Average decline of a leader is 72%

· Only 1 out of 8 leaders will return to lead in the bull market cycle

Buy & Hold vs Hold a leader for the run, then sell

· A leader’s run lasts 12-15 months

Buy stocks with low P/Es vs Never use P/Es for buying

· P/E is an end result, not a predictor

Fundamentals vs Charting

Charts reveal

· Institutional demand

· Overall health of your stock

· Best time to buy & sell

Types of Base Patterns

1. Cup-with-Handle

2. Double Bottom

3. Flat Base

4. Saucer-with-Handle

5. Base-on-Base

6. Ascending Base

7. High Tight Flag

CANSLIM

C = Current Quarterly Earnings

- Recent earnings growth of at least 25%

- Would like acceleration over the past 3 quarters

A = Annual Earnings Growth of at least 25% over the past 3-5 years

- Sales: Minimum 25%

- Margins: Best in the industry

- Return on Equity (ROE): 17%

N = New

- New Products or Services

- New Price Highs

- New Condition in the industry

- New Management

- New or Newer companies

- 75% of leaders had an IPO within 8 years of their biggest move

S = Supply and Demand

- Shares outstanding + big-volume demand

- Smaller number of shares outstanding will move faster than a large number of shares outstanding

L = Leader vs Laggard

- Buy leading stocks

- EPS, sales, price performance, whatever

- Leading industry group

I = Institutional Sponsorship

- Look for 2-3 quarters of rising sponsorship

- At least 10 funds

- Stocks on the Move

M = Market

- Buy during a confirmed market rally

- All bets are off when the market is in a downtrend

- 3 of 4 stocks follow the general market trend

Using the newspaper – Investors Business Daily

EPS Rating

· Measures a company’s earnings over the past 3-5 years

· Good for researching the “C” and “A” in CANSLIM

Relative Price Strength

· Measures stock’s price performance over latest 12 months compared to all stocks

· Good for researching the “L” in CANSLIM

Industry Group Relative Strength

· Compares 6-month price performance of industry performance to other industry groups

· Rated on an A+ to E scale

· Good for the “L” in CANSLIM.

SMR

· Sales + Profit Margins + Return on Equity

· Sales growth over the last 3 quarters

· Pre-tax and after-tax margins

· Uses A to E scales

· Good for researching the “C” and “A” in CANSLIM

Acc/Dis

· Tracks relative degree of institutional buying/selling in stock over last 13 weeks

· Rated on A to E scale

· Good for researching the “S” and “I” in CANSLIM

SmartSelect Composite

· Combines all SmartSelect ratings into one rating

Vol % Change

· Measures how much a stock traded on a given day vs its 50 DMA

· Good for tracking institutional demand and for the “S” in CANSLIM

The Big Picture

· Read for the “M” in CANSLIM

Info Sources

· IBD Stock Checkup

· IBD Archives

Places to go in IBD

· IBD 100

· IBD Big Cap 20

· Your weekly review

· CANSLIM Select List

· The New America

· Stocks on the Move

· The Big Picture

· Mutual Funds Top Buys

· Top Earnings

· Follow the Leader

· Screen of the Day

· IBD extra! Newsletter

· Media Center

· IBD Forums

· IBD Time Saver Table

85/85 Index

· Price above $15

· Stock price within 15% of its 52-week high

· EPS and relative strength rating of 85 or greater

· Average daily trading volume of 10,000 shares or more

Cup-with-Handle

· Prior run-up of at least 30%

· Correction of 20%-30%

· Handle forms in upper-half of pattern

· Volume dries up in handle

· 7 weeks minimum length from peak at start to breakout

· 65 weeks maximum length

7 point Base Checklist

· Prior Uptrend

· Type of Base

· Length of Base

· Essential characteristics of base

· Volume dry-up/shakeout

· Identify buy point

· Breakout (50%> Volume surge at buy point) – do not buy 5% above the breakout point

Double Bottom

· Prior run-up of at least 30%

· Second leg down undercuts first leg

· Volume and volatility may be high in 2nd bottom

· 7 weeks minimum length from peak at start to breakout

Flat base

· Prior run-up of at least 30%

· Corrects less than 15% throughout base

· 5 weeks minimum

Reasons for Selling

· Protect Capital

o Cut losses at 8% from purchase price

· Lock in Profits

o Sell on weakness; institutional selling, break below key support, gap down

o Sell on strength; take profits when stock has risen 20%-25% from buy point (except: if stock rallies 20% or more in first 3 weeks – if so hold 8 weeks.)

· Distribution in the General Market

o Change in market direction

o Distribution days in key indexes

o Market cycle

Common Mistakes

· Miss breakout

· Excessive 8% losses or big losses

· Sell too soon

Suggestions

· Always trade in sync with the market

· Never buy on rumors or tips

· Evaluate your portfolio

· Contain your emotions

· It’s all about education

Doug Roberts Page 4 7/2/2008