Jo Jeeta Wahi Sikandar Bazaar ho ya Cricket
November 13 2021 | Reading Time: 10 Minutes
New Zealand and Australia are set to battle it out in the T20 World Cup final this Sunday. The two teams are yet to add a T20 World Cup title to their names; hence, this edition is set to give us a new winner. However, the two teams did not feature among the favorites at the start and during the tournament. Cricket pundits were rooting for England and Pakistan to make it to the finals, but the two got knocked out in the semis. So it's not about the emotions or what one feels that works. It's always the best performer during a series or a match that wins.
It’s not easy to predict winners in cricket. But when it comes to the stock market, William O'Neil has set the rules to identify the probable winners. It’s the CANSLIM technique.
Once you have an idea about the company, its products, growth drivers, fundamental profile, and market direc tion, the next step in becoming a stock market pro is learning to read stock charts. It will tell you the correct time to buy/sell. Even the best quality stocks fail to perform if their technical setup is not proper. Reading charts is an essential skill, especially for a novice investor, to identify a suitable stock for investment. The selection of the right stock to add to your portfolio will decide the profits and returns you earn in the future. William O'Neil used different chart patterns to identify the correct buy-point. Three of the most common patterns are explained in this report.
[Cup-With-Handle]
The stock needs to show a 30% uptrend from any price point, but it must be before the base's construction. Or, the stock must show a minimum 20% increase from a prior breakout. The cup-with-handle must be at least seven weeks long. If there is no handle, then the cup itself must stretch a minimum of six weeks.
The handle alone needs at least five days to form, but it could go on for weeks. Make sure it doesn't exceed the cup portion in time or the size of the decline. A good cup-with-handle should truly look like the silhouette of a nicely formed teacup. The handle always shows a smaller decline from high to low; it represents a final shake out of uncommitted holders, sending those shares into sturdier hands in the market. In most cases, the decline from high to low should not exceed 10% to 15%. During bear markets, some good cup-with-handle bases show a large, double-digit decline within the handle. But again, it should not exceed the drop within the cup.
The Handle? It Must Be High Enough
The handle should form in the upper part of the entire pattern. If it's too low, it's flawed. One way to check if that handle is proper: use the simple midpoint test. Add the highest price and lowest price within the handle and divide by 2. That number should be greater than the midpoint of the actual base itself.
Avoid Deep Bases
Try to limit your picks to cups that are no more than 30% or 33% deep, except for those built during a bear market. In that case, an exceptional growth stock can fall 40%, 50%, or more and still make a successful break out. Still, shallower is better. It shows that the big hands are catching the stock. Look for volume to dry up along the lows of the base. Volume should be light in the handle, too. Tighter price action is better. This is true of almost all bases. A loose, choppy base shows the stock needs to go far for price discovery. If institutions are holding on to the stock, it won't fall too far.
The [Buy Point ]
This, of course, is where all the above parameters lead if they appear correctly. The buy point from a cup-with-handle base appears at the highest point of the handle.
Volume On The [Breakout ]
When the stock is breaking out, you should generally see a rush in turnover. Volume should ideally rise at least 40% above its 50-day average. For small and midcap stocks, expect breakout volume to double or triple.
[Double-Bottom Base]
Double bottoms tend to form while the overall market is volatile, and that's reflected in the shape. You have one down leg, then the stock tries to rally but hits resistance and ends up pulling back to form a second down leg. The stock rebounds one more time and is finally able to punch through and move higher. The breakout typically occurs when the overall market has also bounced back from a correction into a new uptrend.
Like the cup-with-handle and all other bases, the buy point for a double bottom is 0–5% above the most recent area of resistance. That's the peak in the middle of the W. Breaking through that resistance on unusually heavy volume shows institutional investors are back in the game, aggressively scooping up shares.
Remember how the handle in the cup-with-handle shook out the weaker holders? You have the same concept here, just in a different place. Note how the bottom of the second leg in a double bottom undercuts the bottom of the first leg. That gets rid of the weaker holders, leaving more committed investors who create support for the stock's new run.
What to look for in a double-bottom base:
Flat Base
Stocks cannot continue to make higher highs despite their superior fundamental and growth stories. They'll go up for a while, take a breather, pull back to form a new base, and then resume their climb – giving you multiple opportunities to make money. The flat bases are a classic example in this regard, which are typically formed after a stock has made a nice gain from a cup-with-handle or double-bottom breakout. That's why they're often considered "second-stage" bases.
Here are the key concepts to understand about flat bases:
Trading Sideways to "Digest" Earlier Gains: Stocks often break out of a cup-with-handle or double-bottom pattern to run up at least 20% before essentially trading sideways to form a flat base. It's a mild decline com pared with other patterns (no more than 15%). Usually, the price range remains fairly tight throughout a flat base. It may imply that institutional investors — who have to buy tens of thousands or more shares to estab lish a large position — are quietly buying within a certain price range. That's how they increase their holdings without significantly driving up their average cost per share.
Support and Resistance: Again, the buy point is above the most recent area of resistance (the highest price point within the flat base). Until the stock breaks through that "ceiling" (preferably on above-average volume), it won't be able to launch the next leg of its climb.
Shakeout: Like other patterns, flat bases also have a way of shedding weaker holders
Instead of a sharper sell-off like the handle in a cup-with-handle or the second-leg undercut in a double-bot tom, the flat base shakeout is more of a slow grind. The weaker, less committed investors just get worn out by the indecisive, sideways action, and eventually, lose patience and sell.
What to Look For In a Flat Base:
Prior uptrend: 20% or more
Base depth: 15% or less
Base length: At least 5 weeks.
Ideal buy point: 0 to 5% above the most recent area of resistance (the highest price point within the flat base.)
How to Count Bases & Why You Should?
Along with the type of base, it is important to understand the stages of base.
Stages begin at one and increase with each subsequent base pattern formed. The magnitude of the move between two base patterns will determine whether the stage moves numerically or alphabetically. If the price move from the pivot point of the prior base to the left side high of the current base is 20% or more, the stage will increase by a factor of 1—for example, from Stage 1 to Stage 2.
If the price move is less than 20%, the stage will increase by an alphabetic factor—Stage 1a to Stage 1b.
Base stages help investors identify the progress a stock has made in its price advance, the biggest clue to a stock’s remaining growth potential. It is a good idea to track the number of bases a stock has formed during its current run-up. As a rule of thumb, try to buy stocks that are breaking out of the first or second base of their run. Late-stage bases are riskier. Late-stage means a base that is number three or higher in the base count.
After forming a fourth base, most growth stocks can’t rally much further, if at all. What usually follows is a long, steep slide. After a stock has had a large advance without a major correction, the probabilities are greater that institutional investors will cash in their profits and push the price into a serious decline.
By the time a stock forms a late-stage base, it is usually widely known to investors and running short on fresh buyers. In addition, the late-stage base tends to have unsteady price swings, bouts of strong selling, or other flaws. It is the chart’s way of telling you that the best buying opportunities are gone.
Late-stage patterns can work and sometimes do lead to nice gains, but you should understand that they involve more risk. If you buy a stock on a late-stage breakout, be sure to cut your losses quickly if the stock fails to gain traction and begins to head south.
It’s not easy to predict winners in cricket. But when it comes to the stock market, William O'Neil has set the rules to identify the probable winners. It’s the CANSLIM technique.
Once you have an idea about the company, its products, growth drivers, fundamental profile, and market direc tion, the next step in becoming a stock market pro is learning to read stock charts. It will tell you the correct time to buy/sell. Even the best quality stocks fail to perform if their technical setup is not proper. Reading charts is an essential skill, especially for a novice investor, to identify a suitable stock for investment. The selection of the right stock to add to your portfolio will decide the profits and returns you earn in the future. William O'Neil used different chart patterns to identify the correct buy-point. Three of the most common patterns are explained in this report.
[Cup-With-Handle]
The stock needs to show a 30% uptrend from any price point, but it must be before the base's construction. Or, the stock must show a minimum 20% increase from a prior breakout. The cup-with-handle must be at least seven weeks long. If there is no handle, then the cup itself must stretch a minimum of six weeks.
The handle alone needs at least five days to form, but it could go on for weeks. Make sure it doesn't exceed the cup portion in time or the size of the decline. A good cup-with-handle should truly look like the silhouette of a nicely formed teacup. The handle always shows a smaller decline from high to low; it represents a final shake out of uncommitted holders, sending those shares into sturdier hands in the market. In most cases, the decline from high to low should not exceed 10% to 15%. During bear markets, some good cup-with-handle bases show a large, double-digit decline within the handle. But again, it should not exceed the drop within the cup.
The Handle? It Must Be High Enough
The handle should form in the upper part of the entire pattern. If it's too low, it's flawed. One way to check if that handle is proper: use the simple midpoint test. Add the highest price and lowest price within the handle and divide by 2. That number should be greater than the midpoint of the actual base itself.
Avoid Deep Bases
Try to limit your picks to cups that are no more than 30% or 33% deep, except for those built during a bear market. In that case, an exceptional growth stock can fall 40%, 50%, or more and still make a successful break out. Still, shallower is better. It shows that the big hands are catching the stock. Look for volume to dry up along the lows of the base. Volume should be light in the handle, too. Tighter price action is better. This is true of almost all bases. A loose, choppy base shows the stock needs to go far for price discovery. If institutions are holding on to the stock, it won't fall too far.
The [Buy Point ]
This, of course, is where all the above parameters lead if they appear correctly. The buy point from a cup-with-handle base appears at the highest point of the handle.
Volume On The [Breakout ]
When the stock is breaking out, you should generally see a rush in turnover. Volume should ideally rise at least 40% above its 50-day average. For small and midcap stocks, expect breakout volume to double or triple.
[Double-Bottom Base]
Double bottoms tend to form while the overall market is volatile, and that's reflected in the shape. You have one down leg, then the stock tries to rally but hits resistance and ends up pulling back to form a second down leg. The stock rebounds one more time and is finally able to punch through and move higher. The breakout typically occurs when the overall market has also bounced back from a correction into a new uptrend.
Like the cup-with-handle and all other bases, the buy point for a double bottom is 0–5% above the most recent area of resistance. That's the peak in the middle of the W. Breaking through that resistance on unusually heavy volume shows institutional investors are back in the game, aggressively scooping up shares.
Remember how the handle in the cup-with-handle shook out the weaker holders? You have the same concept here, just in a different place. Note how the bottom of the second leg in a double bottom undercuts the bottom of the first leg. That gets rid of the weaker holders, leaving more committed investors who create support for the stock's new run.
What to look for in a double-bottom base:
- Prior uptrend: 30% or more
- Base depth: 35% or less
- Base length: At least 7 weeks. The first down week in the base counts as Week 1 • Peak in middle of W: Should form in the upper half of base and should be below the left-side peak • Undercut: Bottom of the second leg down should be lower than the bottom of the first leg down Volume on the day of breakout: At least 40–50% above average
- Volume on the day of breakout: At least 40–50% above average
Flat Base
Stocks cannot continue to make higher highs despite their superior fundamental and growth stories. They'll go up for a while, take a breather, pull back to form a new base, and then resume their climb – giving you multiple opportunities to make money. The flat bases are a classic example in this regard, which are typically formed after a stock has made a nice gain from a cup-with-handle or double-bottom breakout. That's why they're often considered "second-stage" bases.
Here are the key concepts to understand about flat bases:
Trading Sideways to "Digest" Earlier Gains: Stocks often break out of a cup-with-handle or double-bottom pattern to run up at least 20% before essentially trading sideways to form a flat base. It's a mild decline com pared with other patterns (no more than 15%). Usually, the price range remains fairly tight throughout a flat base. It may imply that institutional investors — who have to buy tens of thousands or more shares to estab lish a large position — are quietly buying within a certain price range. That's how they increase their holdings without significantly driving up their average cost per share.
Support and Resistance: Again, the buy point is above the most recent area of resistance (the highest price point within the flat base). Until the stock breaks through that "ceiling" (preferably on above-average volume), it won't be able to launch the next leg of its climb.
Shakeout: Like other patterns, flat bases also have a way of shedding weaker holders
Instead of a sharper sell-off like the handle in a cup-with-handle or the second-leg undercut in a double-bot tom, the flat base shakeout is more of a slow grind. The weaker, less committed investors just get worn out by the indecisive, sideways action, and eventually, lose patience and sell.
What to Look For In a Flat Base:
Prior uptrend: 20% or more
Base depth: 15% or less
Base length: At least 5 weeks.
Ideal buy point: 0 to 5% above the most recent area of resistance (the highest price point within the flat base.)
- Volume on the day of a breakout: At least 40–50% above average
How to Count Bases & Why You Should?
Along with the type of base, it is important to understand the stages of base.
Stages begin at one and increase with each subsequent base pattern formed. The magnitude of the move between two base patterns will determine whether the stage moves numerically or alphabetically. If the price move from the pivot point of the prior base to the left side high of the current base is 20% or more, the stage will increase by a factor of 1—for example, from Stage 1 to Stage 2.
If the price move is less than 20%, the stage will increase by an alphabetic factor—Stage 1a to Stage 1b.
Base stages help investors identify the progress a stock has made in its price advance, the biggest clue to a stock’s remaining growth potential. It is a good idea to track the number of bases a stock has formed during its current run-up. As a rule of thumb, try to buy stocks that are breaking out of the first or second base of their run. Late-stage bases are riskier. Late-stage means a base that is number three or higher in the base count.
After forming a fourth base, most growth stocks can’t rally much further, if at all. What usually follows is a long, steep slide. After a stock has had a large advance without a major correction, the probabilities are greater that institutional investors will cash in their profits and push the price into a serious decline.
By the time a stock forms a late-stage base, it is usually widely known to investors and running short on fresh buyers. In addition, the late-stage base tends to have unsteady price swings, bouts of strong selling, or other flaws. It is the chart’s way of telling you that the best buying opportunities are gone.
Late-stage patterns can work and sometimes do lead to nice gains, but you should understand that they involve more risk. If you buy a stock on a late-stage breakout, be sure to cut your losses quickly if the stock fails to gain traction and begins to head south.
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