How To Recognize Great Performing Stocks

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1 How To Recognize Great Performing Stocks Your guide to spot the cup-with-handle chart pattern. >> #1 in a Series of 5

2 How To Recognize Great Performing Stocks When you read this simple 16-page booklet, you have in your hands the first step to your becoming financially independent for the rest of your life! The freedom and opportunities in America are unlimited. Contrary to a negative national news media, America is the most productive, successful country in the world and it makes no difference where you come from, what you look like, old or young, rich or poor you can make it and become financially successful if you have the drive, desire, and determination to work at it and never give up. Why? Because entrepreneurs, innovators, and inventors are the key driving force behind every U.S. economic cycle. There are dozens of new Apples and Googles every cycle. They create the vast majority of our new jobs, products, and new super stock market winners not our big older companies that are downsizing and losing market share. Now, the most incredible secret is that while half of all Americans invest in the stock market in one way or another, few have any idea how to recognize or benefit from the next Apple or Google. That s what we will show you how to do in the rest of these pages. To begin with, exceptional stock selection is all about vital facts, never personal opinions which can easily be wrong. It s also about human nature and psychology. You need to learn the things you think you know about buying stocks that you must stop doing, and the historically proven new rules and principles you need to start using to materially improve your results. Next, you must look for the very best stock in a better-performing industry. It will be the stock with the best and typically accelerating percentage increases in its recent quarterly earnings per share and sales plus, either a high return on equity or pretax profit margin and it will have either a superior new product in broad demand, a significant improvement in its industry conditions or new management. But, here is the real secret that only one in every hundred or so investors understand and use with any skill. You must learn how to read and interpret daily, weekly and monthly price and volume charts 2

3 that can tell you if a stock is behaving properly or not and if it is under accumulation (institutional buying) or not. Charts measure the actual supply and demand for a stock in the real marketplace and the best, least risky time to begin your buying and the worst, most risky times to buy or continue holding a stock. This is an enormous advantage when you combine it with a stock s superior fundamentals like strong earnings and sales. Charts, to a smart investor, are just like MRIs to a doctor who wants to see the true facts of what s really going on rather than relying solely on opinions or guesses. Or, when you drive across the country, you want a road map to make sure you know where you re going, right? The Cup-with-Handle Pattern The most common highly successful chart pattern we have is named the Cup-with-Handle, because it looks like a teacup if viewed from the side. You will find hundreds of these in every new bull market, so study these patterns carefully until you have their similar images deeply imbedded in your mind. Cup-with-Handle Traits - Depth % - Prior price uptrend of at least 30% Old high occurs when a stock moves up through the handle s high on heavier than normal volume, at least a 50% increase above the stock s average daily volume. Handle should form in upper half of the cup, and within 15% of old high. Base Length - base should occur over at least 7 weeks, but can last much longer. The stock usually corrects 20-30% from the peak (left side of the cup), but can be as deep as 50% in bear markets. The handle lasts one week or more and drifts downward 8 to 12% along its lows but as much as 20-30% in bear markets. Volume may dry up in low area of handle. 3

4 The cup-with-handle is a great way to spot leading stocks at the beginning of every major new market uptrend, which usually occur a few times every year. Leaders tend to break out of sound chart patterns like the cup-with-handle in the early days and weeks of each new uptrend. Therefore, it is vitally important to know when the market begins a new uptrend or correction since 75% of all stocks follow the general market trend. It takes a while to spot these patterns, so study this booklet closely. See more charts in Investor s Corner in IBD. Plus, visit our web site, Investors.com to view more samples in the education section and video examples in the Daily Stock Analysis. It is key to understand that over 90% of all successful bases are formed during corrections in the general market. So, a correction is actually a good thing, since it sets up winning stocks for the next uptrend. But, it is also the time when media coverage will be negative so you have to learn to read what the market itself is telling you and be prepared to buy when the market starts a confirmed new uptrend. The chart at the right gives you definitions of key features included in IBD chart examples. You can use this as an additional reference as you go through this booklet. We look forward to helping you become a more successful investor! William J. O Neil 4

5 Chrysler Increased 353% in 98 Weeks Weekly Chart S&P 500 Index S&P 500 correction Thick black line means stock closed at a higher price than prior week s close Thin gray line means stock closed at a lower price than prior week s close High Close Low 10-week moving average line 200-day moving average line Relative Price Strength Line vs. S&P 500. Uptrending line means stock is outperforming S&P 500. Stock splits Weekly volume bars Average weekly volume line 5

6 6 Apple Increased 1534% in 99 Weeks This stock was found just by going through a once a week chart book on 2/27/04. Ultimate top $ Company has new product: ipod At the buy point: Current quarterly Earnings Per Share (EPS): +433% Prior quarter EPS: +300% Last 3 quarters sales accelerated: +8%, +19%, to +36% The P/E ratio was 72 before it increased 1534% (so much for the myth that you should only buy low P/E stocks). The quarterly earnings were the vital factor not the P/E ratio. 20-week cup-with-handle pattern with: 6 weeks on the left side of base 4 weeks along the bottom of the cup 3 weeks up on the right side of cup 7 weeks sideways in handle Handle area has 6 weeks in a row with prices closing in a tight range (closing prices shown by horizontal slash marks). This is a sign of accumulation (professional buying). Breakout week s volume was 82% above avg. weekly volume

7 Wal-Mart Stores Increased 967% in 163 Weeks Wal-Mart put discount stores in small towns where there was no competition. When did you first shop in a Wal-Mart? Wal-Mart ultimately went up another 4,712% for a total of 51,240% from the initial buy point. EPS accelerated in March 1980 quarter up +48% from +29% in prior quarter Annual EPS Growth was +36% Sales were up +36% Market correction Note similarity of Wal-Mart and Chrysler cupwith-handles. The more history you know, the more you will improve your stock selection. Recognizing sound chart patterns and insisting on big earnings and sales increases can improve your results. Return on Equity was 26% Many other chart patterns formed on the way up until Wal-Mart s peak in December Handle has 4 weeks in a row of tight closing prices. Big volume clue 7

8 8 Redman Industries Increased 849% in 49 Weeks At the buy point: Mobile Home industry sales were up 25% per year Current quarterly EPS $0.12 vs. $0.04: +200% I was shaken out of the stock in this market correction and learned a valuable lesson. Charts just give you the facts of Charts just give you the facts of what s happening - no opinions. Up 20% in 1st week out of base signals strength of a big winner. Note similarity to Baidu.com in 2007; one corrected 30%, the other 27% with same fast run up and handles. Big volume demand like Baidu.com in Note huge volume on prior uptrend to cup-with-handle.

9 Baidu.com Increased 223% in 25 Weeks Chinese internet company Market correction There was also a huge cup-with-handle base from Sept quarter to June 2007 quarter buy point Note tight closes each week. Note similarity to Redman chart in Key volume demand like Redman. 9

10 10 Priceline.com Increased 321% in 85 Weeks You probably saw the TV ads, but did you see the 15-week cup-withhandle during the summer of 2006? Were you using charts then? If not, just remember most of the best performing professionals use them along with their fundamental work. General market corrections create over 90% of all bases - so it s key to never get discouraged when new bases are building. Relative Strength line in uptrend Volume measures the amount of supply and demand. Arrows show huge demand.

11 Southwestern Energy Increased 648% in 94 Weeks Price of oil and natural gas goes up due to big demand from China, India, and Brazil. Meanwhile, the US built no refineries for 30 years and was having to import gasoline from foreign countries. The US also prohibited offshore drilling and use of federal lands that were set off limits. This company had 4 quarters of earnings increases before it emerged from its 13-week cup-with-handle. Note how the stock lived along its 10-week moving average price line. Quality growth stocks in an uptrending market can usually be bought on the first 2 or 3 times they pull back to their 10-week line. 11

12 12 Charles Schwab Increased 439% in 26 Weeks Typical cup-with-handle base shows 5-7 weeks on the declining left side of the pattern and corrects 20-30% but can decline 50% in bear markets. Base formed during correction in general market - corrections create your next big winners. Climax top Sell At $29 buy point: 3 year annual EPS growth rate was +23% per year Current quarter was up +25% Relative Price Strength Rating in Investor s Business Daily Research Tables was 96 (price had outperformed 96% of all other stocks) Accumulation/Distribution Rating was B Return on Equity was 29.4% The peak in most handle areas usually gets within 5%, 10% or 15% of the old high of the base, which was $30.67 in Schwab. 2nd week of handle closes at peak, barely down from prior week s close. On breakout week, stock traded 15.7 million shares, about 100% more than average weekly volume.

13 America Online Increased 481% in 23 Weeks At buy point: AOL s current quarter EPS was up +200% Sales were up +67% The number of institutional sponsors had increased for each of the last 7 quarters S & P 500 market average corrects Climax top Sell Leading stocks that eventually have a climax top should be sold and profits nailed down while you still have them. Definition of a climax top: Stock breaks out of sound base and advances over 18 weeks or more and then move accelerates upward for 1 or 2 weeks up 25 to 50%. Daily chart will show 7 out of 8 days or 8 out of 10 days up in a row with one day being the largest point gain in one day since the beginning of the whole move from its base. Using charts and knowing this rule got most investors out of growth stocks before the market correction of Sound chart patterns all have a strong prior uptrend of 30% or more and good volume. 4-week handle area Breakout week s volume should always be higher than prior week s volume. 13

14 14 Qualcomm Increased 2567% in 52 Weeks Qualcomm (cell phone company) at buy point had: Current quarterly EPS of +29% Quarterly sales up +54% P/E ratio of 35 IBD Accumulation/Distribution Rating of A Relative Price Strength Rating of 81 A general market follow-through day occurs when either the Dow Jones industrials, S&P 500, NYSE Composite, or Nasdaq Composite on IBD s How s the Market? page has an attempted rally that after the first 2 or 3 days can show a powerful percentage increase on higher volume than the prior day. At that time and over the next several weeks, future big leaders like you see in this booklet will breakout -- so these are the things you can t afford to miss... but you need rules and past examples to guide you. General market correction Staying in phase with the general market direction is vital, because now you see that 90% of all new chart bases are formed during market corrections, you raise some cash when corrections start and wait for what we call follow-through days that occur when a new uptrend finally starts... that happens when an eventual attempted rally has a follow-through day anytime after the 3rd day of an attempted rally. A follow-through day must show increased volume, either the Dow Jones industrials or Nasdaq Composite are up 2% or more, or the NYSE Composite or S&P 500 is up 1.7% or more. Historically, 70% of follow-through days work. s happen at or shortly after follow-through days. Climax top Sell Downtrend line along tops shows a possible early buy point. Big volume clue

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15 Subscriber Services Educational Hotline Call to get instant answers to your questions about using IBD, Investors.com and the CAN SLIM Investment System. Available M-F 5:30am-4:30pm and Sat 7:00am-3:30pm (PT) Investors.com Don t forget to take advantage of all the powerful investing tools and stock lists at our website, IBD s Level I Investing Workshop now available in a Home Study Program! Kit Includes: 4 DVD s of Instruction on: The System Stock Selection Chart Analysis When to Buy When to Sell How to use Investors Business Daily and Investors.com 2 Workbooks to help you learn and apply the strategies Bonus CD - Interview with William J. O Neil, founder of FREE GIFT! - Handy tote bag embroidered with the IBD logo Call Now! (Hours: 5:30am-4:30pm, Monday - Friday / 7:00am-3:30pm, Saturday)

16 12655 Beatrice Street Los Angeles, CA Investors.com How To Recognize Great Performing Stocks Your guide to spot the cup-with-handle chart pattern Investor s Business Daily, Inc. Investor s Business Daily, IBD and CAN SLIM and corresponding logos are registered trademarks owned by Data Analysis, Inc., an affiliate of Investor s Business Daily. BLKT-CUP-01

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