Colorado springs meetup group 14 jun 2014

1. Colorado springs meetup group 14 jun 2014 For informational use only

2. How to read charts • Overhead supply • Growth stocks consolidation vs. market consolidation • Base counting

3. Overhead supply • A stock hits resistance at levels where certain shareholders have decided to sell. An institution could be hitting its projected price target. Or the stock may be 20% to 25% above its most recent buy point, triggering some investors to take profits. • One specific form of resistance is called overhead supply. This scenario occurs when a stock has fallen well below its prior highs. Investors who bought in at the former, higher levels and who rode the stock through its downturn may now be underwater. • As shares approach their prior high, submerged investors are often ready to sell, hoping to get out while they can break even. • One reason new highs often represent opportunities is because of something market pros call overhead supply. • Suppose a stock that once traded at $50 falls to $25. If it rebounds, investors who bought near $50 start hoping the stock gets back to the old high so they can sell and break even. This presents selling pressure near the $50 mark. • But once it clears that $50 hurdle, the stock is no longer burdened by disappointed investors looking to wipe out losses.

4. Overhead Supply Overhead Supply Volume dry-up before break-out = lack of sellers Lagging RS line Shake-out near the bottom

5. Base Checklist: • Look for strong volume on the break-out. • Clears overhead supply/resistance on >50% above average volume. • Volume dries up prior to break-out. • Relative Strength line at new highs w/break-out. • Tight closes near the bottom. • Proper shake-out near bottom. (heavy volume sell off near lows) Overhead Supply Daily; notice how the stock closes in upper half of trading range. Shake-out near the bottom

6. Study how a stock market winner falls from a peak • A stingy decline from its highs indicates limited amounts of selling by pensions, mutual funds, banks, sovereign wealth funds and other institutional players. In contrast, a deep drop — think 40% to 50%, or even greater — is a loud warning to stay away. After such a brutal sell-off, a former highflier is less likely to craft a solid new base, produce another powerful breakout, and vault to new highs. • Specifically, how stingy is a "stingy decline"? • Keep this useful rule of thumb: Leading stocks generally fall 1.5 to 2.5 times the decline in the major indexes. So, if the Nasdaq were to make an intermediate correction and fall, say, 12% from its peak, a market leader will likely decline 18% (1.5 times) to 30% (2.5 times) from its own 52-week or all-time high. • That's a normal range of decline in which key chart patterns — such as the cup with handle, saucer and double bottom — form. • Buying off a breakout from such a pattern gives an individual investor a market edge. If the breakout works, the investor makes money immediately. If the pattern is flawed, the breakout will fizzle quickly, giving the astute trader the signal to cut losses fast and search for a better play. • In some cases, a terrific growth stock will fall only a little more than the major indexes, particularly during a bear market. Don't ignore this. It's often a sign of true strength.

8. Shake-out. Closes in lower half or wide spread closes in upper half of weekly ranges.

13. When to hold a stock. • Does the stock close above the 50 DMA or 10 WK MA.

14. Tight Weekly closes.

15. Chart School and Pattern Recognition • Base Counting • The reason we count bases is to help us understand the risk versus reward for when we enter a stock.

28. Chart School and Pattern Recognition • Three Weeks or more Tight • Buying by institutional investors can be seen in a very subtle way by looking at tight areas. • There are two things we check for tightness • The range between the high and low for a given week. The range of a stock is shown by the vertical price bar. On a weekly chart, the top of the bar shows the highest price the stock traded for the week and the bottom of the bar shows the lowest price the stock traded for the week. A long vertical bar, or looseness, suggests investors are uncertain as to where a stock should be priced. Conversely, a short vertical bar, or tightness, suggests that buyers and sellers are closer to agreement on the stock’s price. • Closing prices remaining relatively unchanged for a number of weeks. Institutions may give their traders instructions to accumulate shares up to a certain price. Any selling pressure on the stock is soaked up by the institutions accumulating shares in this manner. Much of this action takes place late in the week, so each week closes relatively unchanged from the prior week. Additionally, if the tight closes occur after the stock has staged a move up, it shows an unwillingness of investors to give up their shares. The signal to watch for is three weeks in a row, or more, of tight closing prices. Buys can be made as the price moves up out of the short consolidation area.

29. Chart School and Pattern Recognition • Three Weeks or more Tight • View on a Weekly Chart. • The more extended this pattern is from the primary chart pattern, the greater the risk of failure. • The pattern occurs when week 2's close is within 1% of week 1's close, and week 3's is within 1% of week 2's close. • Confirm a tight “range” visually. No math definition exists for this. • The proper buy point is 10 cents above the high in the pattern.

30. Chart School and Pattern Recognition – Three Weeks Tight Weekly

31. Chart School and Pattern Recognition – Three Weeks Tight Daily

32. Chart School and Pattern Recognition • Short Stroke • Best viewed on a Weekly Chart. • Two week Pattern. First week begins with a major surge in price. The second week of the pattern, trading will be very tight. • Generally, the high in the pattern is in the first week. • Generally, the second week closes very near the close of the first week. • The high price in the 2nd week is generally not higher, than the high of the first week. • Volume in the 2nd Week should be lighter, than the volume in the first week. • Add 10 cents to the high in the pattern.

33. Chart School and Pattern Recognition – Short Stroke Weekly

34. Chart School and Pattern Recognition – Short Stroke Daily

35. Chart School and Pattern Recognition • Base Counting • Use weekly charts. • Growth stocks usually form a series of bases during their long price run ups. • Breakouts from third or fourth stage bases are often more likely to fail than breakouts from bases earlier in a stock's run. So it's best to avoid buying stocks that are breaking out of them. • When counting bases use these rules: • Each base should form at least 20% above the buy point of the base that preceded it. • If the advance is less than 20% and the stock builds another base, it's a base-on-base pattern and is counted as part of the previous base. • Many stocks will form bases while their fundamentals are soft. Generally you don't count these bases until the first one that forms when earnings and sales growth start running at least 25% on a quarterly basis.

36. Chart School and Pattern Recognition- • Base Counting continued • Base Counts can be reset with: • Bear market decline of more than 20%. • Stocks start a fresh base count when they correct severely enough to undercut the low point in their last base pattern. • When they base for longer than 1.5 - 2 years. • With a 66% decline in the price of a stock. • Other Base Counting Issues • How long does a base need to be in order to be included in the base count (4, 5, 6, or 7 weeks)? • How long does a base need to be in order for it to be undercut and reset the base count (4, 5, 6, or 7 weeks)? • A base forms, and another one forms (up 15% from the first base), and another one forms (up 15% from the 2nd base). Is the third base a 2nd or 3rd stage base? Create your own definition. • You have a 20% correction on the Nasdaq, meeting the requirement to reset all bases. Is this base reset as “thorough” as the 2008-2009 bear market reset?

37. Chart School and Pattern Recognition • Base Counting continued • Schematic showing 1st and 2nd stage base. The high of base 2 is more than 20% above the pivot point in base 1. $120.01 $100.00

38. Chart School and Pattern Recognition • Base Counting continued • Schematic showing two 1st stage bases. $119.99 $100.00

39. Chart School and Pattern Recognition • Base Counting continued • Schematic showing base count reset. The base on the right is now a first stage base.

40. Chart School and Pattern Recognition Weekly

41. Chart School and Pattern Recognition Weekly

42. Example of a Base reset.