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How To Recognize Great Performing Stocks >>

Your guide to spot the double bottom chart pattern.

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How to Recognize Great Performing Stocks


In this 16-page booklet, you will continue your education on becoming a better investor and achieving financial freedom. Investors Business Daily is designed to make sure youve got the right stocks on your radar. Chart reading is all about making sure you are buying those stocks at the right time. Youve heard the saying, timing is everything. Thats especially true in the stock market. Buying at the right time, is the first step in how you handle your stock. If you dont buy it right, chances are your holding and sell decisions wont be right either. So, how do charts help you? By looking at the price and volume, you get insight into the psychology of investors. After careful study, you will find the same patterns appear over and over throughout time. In fact, our database has examples of stocks from the 1890s that formed patterns similar to those in the last few years. The reason for the similarity is simple, human nature rarely changes. Although we focus on chart patterns in this series of pamphlets, remember its only one part of the equation. You must also have strong fundamentals behind any stock youre thinking of buying... Stocks with significant percentage increases in their recent quarterly earnings per share and sales growth and a high return on equity. These strong fundamentals will usually be due to a new product or service, or an important change in industry conditions. The point is, you have to know a good deal about the company and its prospects before committing your money to it as an investment.

The Double Bottom Pattern


Old high

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Buy point occurs when the stock clears the middle of the W on heavier than normal volume, usually at least a 50% increase above average.

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Second bottom should slightly undercut the first bottom.

The base correction tends to be more severe but still usually corrects no more than 40% from the peak (left side).

Prio r

Base Length - base should occur over at least 7 weeks, but can last longer.

After the Cup-With-Handle, the second most common highly successful chart pattern is named the Double Bottom. It is easy to identify as it simply looks like the letter W. The only difference is the second leg of the W should go a little lower than the first. This acts as a shakeout of weaker investors. The pivot, or buy point of the double bottom is just as the stock surpasses the middle of the W as its coming up from its second bottom. In some cases, a double bottom may form a handle area, in which case the buy point will be 10 cents above the high of the handle, just like the cup-with-handle. You should use this pamphlet to get a solid idea of what past double bottom patterns looked like, so you can recognize this pattern in stocks during future market uptrends. Its also important to remember that 90% of the time these patterns form when the general market is in a correction, when you are least likely to be thinking of what your next investment should be. As always, you can see more educational examples in Investors 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. The chart on the next page gives you definitions of key features included in IBD chart examples. You can use it as an additional reference as you go through this booklet. We look forward to helping you become a more successful investor.

William J. ONeil

Novell Increased 373% in 61 Weeks


Double bottom description: Point A = beginning of base pattern Point B = bottom of first leg Point C = middle of W which sets the buy point Point D = bottom of second leg Point E = buy point S&P 500 correction

Weekly Chart

10-week moving average line

Thick black line means stock closed at a higher price than prior weeks close High Close Low

Thin gray line means stock closed at a lower price than Base formed during market correction. prior weeks close 200-day moving average line
E A C

B D

Relative Price Strength Line vs. S&P 500. Uptrending line means stock is outperforming S&P 500. All chart prices are adjusted for stock splits shown just above the weekly volume bars. So, the actual price of this stock at buy point E would have been $28 at the time, not $14. Average weekly volume line

16-week double bottom Stock splits Weekly volume bars

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Delta Air Lines Increased 966% in 197 Weeks


Entire airline group became a market leading sector in early 1960s due to introduction of jets which reduced travel time. This was one of the first stocks making new price highs when the new bull market began after the Cuban Missile Crisis ended.

Market correction Note 2nd bottom at point D undercuts 1st bottom at point B of the double bottom pattern but stock closes relatively unchanged for week on increased volume.
E

Buy point Prior uptrend


A C

3 weeks tight closing prices form the handle area.

10-week double bottom with handle

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Syntex Increased 1173% in 42 Weeks

Double bottom pattern looks like the letter W. Almost always, the second bottom at point D should go a little below the first bottom at point B creating a shakeout right at the very bottom. Weekly chart prices are split adjusted for a 3 for 1 stock split of November 1963. Syntex had a new product...the birth control pill. The 3 quarters before buy point E, Syntex had EPS growth of +400%, +800% and +400%!

A 26% correction in the market led to a steeper 62% correction in this double bottom.

Climax top Sell

This is a high tight flag pattern buy point

Prior uptrend

Buy point
C

Big volume up weeks


D

Volume Increases

54-week double bottom

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Amgen Increased 688% in 96 Weeks

Stock went up another 723% before it topped in July, 2000 for a total return of 6,385% in 10 years

Base formed during market correction. At the buy point: Last 3 quarters EPS: +250%, +1000%, +4400% Last 3 quarters sales: +55%, +98%, +216% After-tax margins at their peak.
E

New issue in 1983 Note: many stocks that make huge price gains are entrepreneurial companies that had recently become public. According to our studies, 75% of the biggest winners were new issues at some time in the 8 years prior to their big moves.

Buy point
A C

16-week double bottom

Big volume shakeout, but stock closes mid-range showing support.

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Cognizant Tech Increased 717% in 193 Weeks


At the buy point: Pre-tax margins were 20% Return on equity was 27% New issue in 1998, another example of an entrepreneurial company

Base was forming as market was coming out of 2000-2003 bear market decline.

Buy point
A C

Note: stock pulls back into buy area, normal for some breakouts.

23-week double bottom with handle

Copyright 2008 Investors Business Daily, Inc. All rights reserved

Franklin Resources Increased 168% in 16 Weeks


Climax top Sell Market correction. At the buy point: Last 3 quarters EPS: +100%, +110% to +145% Last 3 quarters sales: +58%, +70% to +90% Return on equity: 83% Pre-tax margin: 38% Buy point
A C E

11-week double bottom

New issue in 1983 example of an entrepreneurial company

Volume growth

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10

EBay Increased 282% in 115 Weeks


New issue in 1998 - example of an entrepreneurial company At the buy point: Last 2 quarters EPS: +58%, +83% Last 2 quarters sales: +47%,+49% Return on equity: 41% Pre-tax and after-tax margins were both at their peak Base formed during bear market and eBay bottomed at the same time as the market.
E

Another buy point

Buy point
A C

9-week double bottom

16-week double bottom

Normal buy point off a double bottom is when stock exceeds price peak at Point C (the middle of the W). A slightly early buy could be when stock price exceeds the downtrend line drawn on the chart. Jesse Livermores 3-point buy rule was...buy if a stock breaks below a prior low at point B ($25.52) as this stock did at point D and then reverses back above the $25.52 low by 3 points to $28.52. This shows a shakeout happened and marks a new uptrend and buy point at $28.52.

Copyright 2008 Investors Business Daily, Inc. All rights reserved

C M E Group Increased 224% in 113 Weeks


New issue in 2002 - example of an entrepreneurial company Base formed during market correction.
E

At the buy point: Last 2 quarters EPS: +89%, +51% Last 2 quarters sales: +46%, +23% Return on equity: 32% Pre-tax margins 49% 40 new mutual funds purchased this stock in March 2005 quarter.

Buy point
A C

5 weeks in a row stock increases in price.

21-week double bottom

Copyright 2008 Investors Business Daily, Inc. All rights reserved

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Cisco Systems Increased 2457% in 177 Weeks

At the buy point: Last 2 quarters EPS: +112%, +133% Last 2 quarters sales: +150%, +155% Return on equity: 36% Pre-tax margins and after-tax margins were at their peaks.

Base formed during market correction.

This all-time classic double bottom eventually went up another 3,522% from this point to its March 2000 top, for a total return of over 92,512% in under 10 years.

New issue in 1990-another example of an entrepreneurial company

Buy point
A C

Chart prices are all adjusted for several 2 for 1 stock splits, so dont think Cisco was $1.90 at the buy point. At the buy point it was actually $27. Pullback into buy area.

13-week double bottom

Copyright 2008 Investors Business Daily, Inc. All rights reserved

Price Club Increased 1074% in 211 Weeks


At the buy point: Return on Equity was 55% Company had 2 warehouse stores in San Diego. Much later they merged with Costco. Sams Club was also later copied after Price Clubs.

Double bottom base formed during market correction.

Buy point
A C

B D

Huge volume demand is way above average volume line.

Double bottom with handle

Copyright 2008 Investors Business Daily, Inc. All rights reserved

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N V R Increased 418% in 192 Weeks


Entire home builders group goes up as interest rates continue dropping.

Although this move started during the long 2000-2003 bear market, the breakout did occur during a short rally after a follow-through day in the market averages which signaled a new uptrend.

A C

Buy point

27-week double bottom

8 weeks in a row stock closes up in price.

Copyright 2008 Investors Business Daily, Inc. All rights reserved

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How To Recognize Great Performing Stocks


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Your guide to spot the double bottom chart pattern.