Technical Analysis II Using Charts to Buy StocksNEWS PRESENTATIONSLecture ContentToday’s lectureMARKET BOTTOMSAnalyzing the MarketMarket BottomsSlide 81998 NASDAQ BottomSlide 101998 NASDAQ Bottom Leaders making major advances @ the bottom1975 S&P 500 Bottom1975 S&P500 BottomChart PatternsChart Patterns / FormationsSlide 16Cup With HandleSlide 18Double Bottom BaseSlide 20Slide 21Slide 22Flat BaseAmgen 1990Strong Characteristics for BasesAccumulation DistributionGap-upSupport WeeksSlide 29Slide 30Break-out volumeSlide 32Additional buy point: Pullback to 50 day moving averageSlide 34ExamplesSlide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42OverviewA Contrarian PointHomeworkTechnical Analysis IIUsing Charts to Buy StocksEconomics 98 / 198Spring 2008Lecture 9NEWS PRESENTATIONSLECTURE CONTENTTechnical Analysis II: Using Charts to Buy StocksToday’s lecture•Analyzing the market−How do know when the market bottomed?−What is a rally? •Stock formations−What are bases? Why are they significant?−How do I identify common stock patterns?−How can I determine whether a stock pattern is strong or weak?MARKET BOTTOMSTechnical Analysis II: Using Charts to Buy StocksAnalyzing the Market•General market direction said to make up 50% of a stock’s move•3 out of 4 stocks follow the direction of the market How is this point important?Market Bottoms•When overall market makes a low point in its downtrend and then turns for a period of improvement•Rally•Follow-Through DayMarket Bottoms1998 NASDAQ Bottom1998 NASDAQ BottomAfter follow-through dayFollow-through day1998 NASDAQ BottomLeaders making major advances @ the bottom1975 S&P 500 Bottom1975 S&P500 BottomUp 30% in 6 monthsCHART PATTERNSTechnical Analysis II: Using Charts to Buy StocksChart Patterns / Formations•A stock can have all the right traits, but sometimes they go through slumps at the end of their big moves or when market turns•Bases: area of consolidation in a stock’s chart pattern•Charts used to identify bases and thus, determine proper entry point into a stockChart PatternsCommon patterns / bases−Cup with handle−Double bottom−Flat base−Ascending Triangle−Symmetrical TriangleCup With Handle•Minimum 7 weeks long•Usually corrects 20-30% from the peak•Handle should drive sideways or downwards with volume drying up• Volume is important (want to see more up weeks with high volume than down weeks with high volume)Investors Business Daily. CAN SLIM Investment Workshop SeriesBuy PointDouble Bottom Base•Looks like a “W”•Second bottom should undercut first bottom•Stock should rally off that low quickly•Buy point when price clears the middle of the “W,” on heavy volumeInvestors Business Daily. CAN SLIM Investment Workshop SeriesBuy PointBuy PointFlat Base•Short in duration – 5 weeks minimum•Stock generally moves sideways or slips slightly – within 15% channel (from high to low)•Often occurs when stock runs up after breaking out of other chart patterns• Volume should fairly tame during the flat baseInvestors Business Daily. CAN SLIM Investment Workshop SeriesAmgen 1990(1) After drifting upward, the stock starts flattening(2) Stock trades between 29 and 32 and for several weeks, consolidates(3) Stock finally breaks through on above average volume Mostly low volume during baseStrong Characteristics for Bases•More ACCUMULATION than DISTRIBUTION (look at weekly chart)•Gaps-up on above average volume•Support Weeks•Breakout (when the price crosses the buy point) must occur on heavy volumeBlue = Up Pink = DownBIG BLUE vs. BIG PINKHere, we see 8 weeks of accumulation versus 5 weeks of distribution in this consolidationShows more action buying the stock than selling the stock in the consolidationAccumulationDistributionGap-up•“Price Jump”•Sign of high demand for stockSupport Weeks•Bars that close near high of the week’s price range−Want to see above average volume•Indicates that institutions supporting the stock and are buy shares on pullbacksIf you look at the support weeks, you’ll notice that the closing price for that week ends on the near the top or upper half of the price rangeYou will also notice that these support weeks have above average volumeBreak-out volume•Stock should surge higher on above average volume when it crosses the pivot / buy point•The volume should at minimum +50% above average−Ideally, would like to see +80%, +200%We can see a double bottom base hereOnce the stock crosses the buy point, we see here that it surges on very heavy volume.Additional buy point:Pullback to 50 day moving average•Often act as support levels for stocks in up-trends•Institutions usually like to add shares here•Presents opportunity to add shares when stocks pullback on LIGHT VOLUME to this support lineCan add shares hereLow volume pullback50% gain here in 2 monthsEXAMPLESTechnical Analysis II: Using Charts to Buy StocksSea Containers Ltd.(Cup with handle)+693% in 14 monthsLimited Brands Inc.(Cup with handle)+267% in 18 monthsInternational Game Technology(Cup with handle)+451% in 13 monthsCup baseCup with handleDouble bottomBancolombia SA AdsBancolombia Sa Ads (NYSE)Cup with handle base (20 weeks) 50% gain in 1.5 monthsPrevious trendBancolombia Sa Ads (NYSE)Double Bottom (9 weeks) 53.6% gain in 5 monthsDouble bottom (4-5 weeks)TradeStation Group IncLong cup with handle baseIncreasing volume on right side of the cupVolume dried up during handleBreakout on very high daily and weekly volumeFrom breakout 65% gain in 2 monthsOverview•Charts important part of investing•Invest with the market− market bottoms / tops•Know common chart patterns – cup with handle, double bottom base, flat base•Look for strength in the base structure•Know when and where to add sharesA Contrarian Point•Stocks are awful•The dollar is awful•Real estate and housing is horrible•Go gold!•Oil is hitting $100/barrel•Foreign currencies are awesome• Avoid what buying what the media or anyone else tells you•These will flip around in the future, so positioning money accordingly today is a great ideaHomework•Look through charts and find a pattern−Be able to explain the strength / negatives−Cups with handle−Double bottom−Flat Base−50-day
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