LOGO The Investor’s Guide To Buying Stock “Launch Pad” Chart Patterns
By Michael Benghiat Founder & President, LifetimeInvestor.com
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Lifetime Investor 11000 Brimhall Road, Suite E-14 Bakersfield, CA 93312 Visit us on the web: www.LifetimeInvestor.com Email: [email protected] TABLE OF CONTENTS
“Launch Pad” Chart Patterns
Introduction Page 1 Cup With Handle Page 4 Cup Without Handle Page 10 Saucer Page 11 W Bottom | Double Bottom Page 12 V Bottom Page 16 Flat Base Page 23 Stock Bases & Base Count Page 25
BONUS SECTION Sell Signal Chart Patterns
Head And Shoulders Page 28 Lower Highs Series Page 30 Death Cross Page 31 Conclusion Page 32 “Launch Pad” Chart Patterns
Introduction
Hello!
This guide is going to show you how to identify and use certain chart patterns that appear in the charts of top-performing stocks.
I call these chart patterns “launch pads” because stocks frequently blast off after forming these patterns.
I’m going to show you six of these powerful “launch pad” chart patterns that you can use to buy stocks. These patterns have a high rate of success in identifying stocks that turn out to be big winners.
In my view, using these chart patterns is the best method to buy stocks, especially growth stocks. Most of these patterns give you a specific price to place your order, and generally provide low-risk buy points.
These chart patterns are the secret as to why some investors consistently make lots of money in the stock market….
Amazingly, every stock that has gone on to 100%, 300%, 500%, 1,000+% gains has broken out from one or more of these five “launch pad” patterns early in its long-term run.
Many stocks that break out of these patterns will move up 20-30% in a matter of a few weeks. In a powerful bull market these are the stocks that can end up making you a lot of money over the following months and years.
Don’t be too quick to take profits or sell when a stock moves up quickly out of these chart patterns. The money is made in the long-term! Here are some 20-year results for some top stocks:
– Celgene – 6,244% return – Oracle – 8,571% return – Qualcomm – 9,232% return – EMC– 9,624% return – Kansas City Southern – 19,030% return ______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 1 “Launch Pad” Chart Patterns
Introduction
Buy-Stop Orders To use these patterns, you place your buy order as dictated by the pattern. Most of the time, these orders are placed above the current price with a buy-stop order. A buy-stop order is only filled when the price reaches or exceeds a certain price.
For example, with the cup with handle formation you buy a stock only when it breaks out into a new high above the handle of the cup.
As counterintuitive as this sounds, buying a breakout into new highs is one of the best way to purchase stocks.
Stock Buy Zone Every chart pattern has an ideal buy price, as you will learn. But if you miss buying at this price, all is not lost. Every stock breakout has a buy zone. This buy zone is up to 5% from the buypoint as indicated by each chart pattern.
Never chase after a stock that rises more than 5% from its buypoint. That horse has left the stable. If you chase it, you increase the risk of losing money if the stock does not keep rising. Just move on and look for another stock that is setting up.
Stop-Loss Orders Nothing is guaranteed in stock investing. Many stock breakouts fail, for a variety of reasons. So, to protect your capital, you must always use a stop-loss order. This is an order to sell a stock when it hits a pre-determined price below its current price.
You must place a sell-stop loss order no more than 7% to 8% below your purchase price. This way, if the breakout fails and the stock starts falling, you will only lose a little. Taking small losses is key! Investing in stocks without stop-loss orders will eventually cause you to take a large loss that will damage your investing funds and more importantly your confidence. Always use stop-loss orders!
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 2 “Launch Pad” Chart Patterns
Introduction
FREE Chart Reading Mini-Course If you are new to chart reading, I have included with this guide a separate mini-course on how to read charts. No matter if you are a complete beginner or more experienced, this mini-course will teach you everything you need to know in order to use charts.
You can find the mini-course here: http://www.lifetimeinvestor.com/charting-tutorial/
OK, let’s look at the “launch pad” chart patterns.
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 3 “Launch Pad” Chart Patterns
Cup With Handle
Cup With Handle
The cup with handle pattern is, in my opinion, the best chart formation to look for when buying stocks. Many stocks have gone on to become huge winners after they have broken out of a cup with handle chart pattern.
This chart formation is quite common, and one of the easiest patterns to spot.
Let's look at a typical cup with handle chart pattern. In the chart below notice that the price formed a rounded cup formation, then a little handle. Your buy order is placed $0.10 above the highest price of the handle. More on this in a moment…
Chart courtesy of Stockcharts.com (Click to enlarge)
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Cup With Handle
The cup with handle formation should have these key attributes:
• The handle should ideally be characterized by low or declining volume. • The breakout ideally should be on volume that is at least 40% higher than normal, which shows that the large institutional investors are buying the stock. It’s best if the volume is 100% or more above normal. • The buy point is 10 cents above the highest price in the handle. • The cup should be a minimum of seven weeks long.
Let's look at some more examples that illustrate these key points.
Below is a cup with handle that shows declining volume in the handle.
Chart courtesy of Yahoo Finance (Click to enlarge)
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 5 “Launch Pad” Chart Patterns
Cup With Handle
Below is a third example of a cup with handle. Again, notice the decreasing volume on the handle.
Note that the handle does not have to be horizontal; in this example it is sloping downward.
Chart courtesy of Stockcharts.com (Click to enlarge)
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Cup With Handle
In the next chart below of Aruba Networks you can see high volume on the breakout above the handle. Why is this important? Higher than normal volume is the sign that the large institutional investors like mutual funds, banks, and pension funds are buying the stock. These large investors are the ones that power the stock higher in the long-term.
Chart courtesy of Stockcharts.com (Click to enlarge)
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 7 “Launch Pad” Chart Patterns
Cup With Handle
To buy a cup with handle, the correct place to place your order is $0.10 above the highest price in the handle. Let’s now zoom in to the handle of the previous chart of Aruba Networks to illustrate this.
Chart courtesy of Stockcharts.com (Click to enlarge)
The highest price in the handle was $5.00. A buy-stop order would have been placed to buy the stock at $5.10, ten cents above the $5.00 handle high. A buy-stop order will only be filled if the price rises to $5.10 or higher.
The beauty of using buy-stop orders is that you only buy the stock if it heads higher. If it starts falling without breaking above the handle, you don’t buy the stock. This way, you only buy a stock that is showing strength by rising! If it is falling, you won’t own it.
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Cup With Handle
Aruba Networks went on to a 635% gain from the buypoint!
Chart courtesy of Stockcharts.com (Click to enlarge)
Let’s recap the key factors that should be present in a cup with handle pattern:
• The handle should ideally be characterized by low or declining volume. • The breakout ideally should be on volume that is at least 40% higher than normal. It’s best if the volume is 100% or more above normal. • The buy point is 10 cents above the highest price in the handle. • The cup should be a minimum of seven weeks long.
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 9 “Launch Pad” Chart Patterns
Cup Without Handle
Cup Without Handle
The cup without handle is another common chart formation. It never forms a handle, and just blasts off from the right side of the cup.
The chart below shows a cup formation that just headed higher without forming a handle.
The entry point is $0.10 above the top of the left side of the cup. Again, you would place a buy-stop order to buy the stock.
Chart courtesy of Stockcharts.com (Click to enlarge)
The cup without handle is not as easy to purchase as a cup with handle, because you are waiting for the handle that never forms. It just takes off, and you sometimes miss the entry point.
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Saucer
Saucer The saucer is just like a cup but only much shallower. Saucer patterns tend to form over a long period of time, sometimes up to a year. Saucer patterns are:
• preceded by at least a 30% uptrend • at least 7 weeks long
They are often found with stocks that are slow growers, such as big cap household names like those in the Dow or utilities.
Below is a saucer pattern that formed over two years in Inland Real Estate, a real estate investment trust.
Chart courtesy of Stockcharts.com (Click to enlarge)
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W Bottom | Double Bottom
W Bottom Or Double Bottom
The W bottom or double bottom looks like a W on a chart. W bottoms are easier to illustrate than explain, so below is an example.
Chart courtesy of Stockcharts.com (Click to enlarge)
The chart shows that the price made a low (the left side of the W) on October 5th, then tested the low soon afterwards on October 15th (the right side of the W). The pattern looks like a W, hence its name.
Once prices didn’t make new lows, investors came back into the stock and drove it higher. Notice the two high volume days when the stock broke out above the W. This is a classic breakout!
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W Bottom | Double Bottom
The right side of the W may be higher or lower than the left side.
Chart courtesy of Stockcharts.com (Click to enlarge)
In effect, a higher right side to the W pattern shows that buyers stepped up at a higher price, and didn’t need to see an equal low or a new low. But note that sometimes the W bottom has equal lows, or even a lower right side of the W by a small amount.
W Bottom Key Points
• The buy point is $0.10 above the top of the middle peak of the W. • Your sell-stop should be placed $0.10 below the bottom price of the W. Ideally this is no more than 7% to 8% below your purchase price. • The breakout should occur on volume at least 40% higher than normal, which shows that the major institutions are behind the move. ______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 13 “Launch Pad” Chart Patterns
W Bottom | Double Bottom
The next example shows a high volume breakout above the W pattern.
Chart courtesy of Stockcharts.com (Click to enlarge)
The high volume breakout is important. Without the heavy volume the breakout becomes more susceptible to failure.
Why? Think of volume as rocket fuel. If there is little volume on a breakout, there is little fuel for the rocket to blast off and continue higher. For a stock to head substantially higher, it needs the big institutional buyers to come in with their millions of dollars to put to work.
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 14 “Launch Pad” Chart Patterns
W Bottom | Double Bottom
The next chart shows a W bottom with support at the 200 day moving average.
Chart courtesy of Stockcharts.com (Click to enlarge)
There are three things you should notice about this chart:
• The right side of the W found support at the 200 day moving average (the red line). This shows a powerful support area that reinforces the stock's action and double bottom pattern. • The stock also dipped right down to the red 200 day moving average in November and then headed higher. This showed institutional investor support. • The day the stock gapped up it found support at the blue 50 day moving average line. This was a good confirmation that the stock had bottomed and was ready to head higher. ______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 15 “Launch Pad” Chart Patterns
V Bottom
V Bottom
The V bottom pattern is not as common as the cup with handle or the W bottom. V bottoms are generally found at the end of a long decline, and show a final capitulation on the part of buyers. Volume is usually huge on the final decline, and prices rise rapidly up, forming the V pattern.
To buy a stock with a V bottom, three important characteristics must appear:
1. The bottom of the V is on the day a hammer candlestick pattern or a doji candlestick pattern is formed 2. The hammer or doji forms on the highest volume day yet during the stock’s decline. 3. Ideally the stock closes at the high of this day (forming a hammer) or closes around the midpoint of the day (forming a doji). These two chart patterns show that buyers stepped back in, and drove the stock well up from the lows of the day.
NOTE: Please review the charting tutorial included with this guide for a review of the hammer and doji candlestick patterns.
The more of a wick you see on the hammer or doji candle, the better! This is a great sign that prices have likely bottomed out.
It is important that the stock not close near the lows of the days, which would form a reverse hammer, which usually points to continued lower prices.
Your sell-stop should be $0.10 below the low of the day. Ideally this low is the lowest price the stock has made in the last weeks or months, like you see in the chart on the next page. Make sure your sell-stop order is placed no more than 7% to 8% below your purchase price.
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V Bottom
Let's look at two examples. In the Hewlett Packard example below, the stock formed a classic V bottom with a doji. The doji formed on the highest volume day in the chart. Prices rose rapidly from this bottom.
I was watching Hewlett Packard during this period, and I ended up buying it at $11.52 on the day it formed the doji on massive volume. This proved to be the bottom.
Chart courtesy of Stockcharts.com (Click to enlarge)
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 17 “Launch Pad” Chart Patterns
V Bottom
Let's zoom in to see the doji a bit better:
Chart courtesy of Stockcharts.com (Click to enlarge)
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V Bottom
As a side note, Hewlett Packard later formed a classic cup with handle, with the V bottom being the bottom of the cup. If you missed the V bottom, you would have had a second chance to purchase the stock. Notice the high volume on the breakout above the handle.
Chart courtesy of Stockcharts.com (Click to enlarge)
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V Bottom
Going back to the V pattern, the Marriott chart below also shows a classic V bottom with a doji that formed on the highest volume in the chart. Prices also rose up rapidly from this low.
The second chart of Marriott shows a closeup of the V bottom and the doji. Notice the highest volume formed on the doji.
Chart courtesy of Stockcharts.com (Click to enlarge)
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V Bottom
Here’s a closeup of the doji at the V bottom:
Chart courtesy of Stockcharts.com (Click to enlarge)
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V Bottom
Here is another example of a V bottom in the S&P 500 Index. This bottom had a double pattern of a hammer followed by a doji. The hammer occurred on very high volume, and the doji had the highest upday volume in the whole chart. Together these two candlestick formations indicated a bottom in the index.
Chart courtesy of Stockcharts.com (Click to enlarge)
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Flat Base
Flat Base
The flat base is a common pattern that usually occurs after a stock has advanced off of a cup with handle or W double bottom pattern.
The flat base moves sideways in a fairly tight price range for at least five weeks and does not correct more than 10% to 15%.
Sometimes flat bases form in a series and look like stepping stones to higher prices, as is seen in the following chart.
Chart courtesy of Stockcharts.com (Click to enlarge)
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Flat Base
Support and Resistance One thing that is important to note on the previous chart is that the top of a flat base frequently becomes the bottom of the next flat base. This is known as support and resistance.
Notice how the bottom of the flat base #3 is the top of flat base #2. This is a good example of how prior resistance (a top in prices) becomes support (a floor for prices).
Buy-Stop Order The buy-stop order should be placed $0.10 above the highest price in the base.
Stop-Loss Order Placement The sell-stop should be placed no more than 7% to 8% below your purchase price, and will likely fall in the previous flat base. You don't want to see a stock break out from a base and then return back to the previous base. This in most cases is a warning that the stock will continue to head lower.
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 24 “Launch Pad” Chart Patterns
Stock Bases & Base Count
Stock Bases And Base Count
Stocks generally form a series of one to five bases before a stock makes a large correction in price. These bases are a series of “launch pad” chart pattern that a stock passes through as it moves higher.
How is The Base Count Determined?
A base is determined by its upper and lower prices. If a correction in a stock's price undercuts the previous bases' high price, the base count is reset back to 1.
In the following example, DigitalGlobe went into a correction in February 2013. By March 2013 the price correction had broken down into the price range of flat base #3. This resets the base count back to 1.
Chart courtesy of Stockcharts.com (Click to enlarge)
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Stock Bases & Base Count
A First Stage Buy Is Best A first base is the ideal time to invest in a stock. Many stocks make their largest moves from first or second stage bases. Stocks tend to rise around 20-25% before consolidating and forming a new base.
It is very common for a stock to break out of a cup with handle as its first base. Flat bases frequently form as base two, and are common after an initial cup with handle formation. These bases stack on top of each other. The previous Digitalglobe chart showed an example.
By the 4th to 5th base, the stock is often near its final high. By this time, the stock has made a huge move, the stock's story is well-known, and most investors who like the stock have already bought.
What usually happens over time is that the expectations for the stock's continual rise become out of whack with reality. Expectations become so high that when the company one day announces earnings or news that is not as good as expected, the stock gets hit hard. Many times this starts a selloff in the stock that wipes out some or all of the whole stock's up move in a short amount of time. This is especially true of growth stocks in the technology area.
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 26 Sell Signal Chart Patterns
BONUS SECTION Sell Signal Chart Patterns
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 27 Sell Signal Chart Patterns
Head & Shoulders Pattern
Signs The Trend Is Ending Knowing when it’s time to sell a stock is a primary skill every stock investor needs to learn. However, trying to determine what will happen in the future is not a black and white process; there is no magic crystal ball or magic indicator. You can only use your best guesstimate.
That said, certain chart patterns and indicators have repeatedly been shown to be pretty accurate predictors of future prices. Let’s go through the most important of these.
Head And Shoulders Pattern To illustrate the head and shoulders pattern, I am going to use a chart of the Dow making its top in 2007 before the financial crisis plunge of more than 50% in March 2009. Though this chart is of a whole stock index, this pattern applies to individual stock charts.
Below is an overview chart showing the top in October 2007 to the bottom in March 2009, and the subsequent rally. The head and shoulders pattern formed between July 2007 and December 2007.
Chart courtesy of Yahoo Finance (Click to enlarge)
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 28 Sell Signal Chart Patterns
Head & Shoulders Pattern
The head and shoulders pattern frequently appears in a stock or stock index that is topping out. It is characterized by the formation of a left shoulder, head, and right shoulder. The head includes the highest price peak of the move, and will be higher than either shoulder.
The following chart zooms in to the Dow in 2007. This pattern marked the top of the market, and the Dow fell over 50% in the months that followed.
The sell point occurs when the stock breaks below the bottom of the right shoulder.
Chart courtesy of Stockcharts.com (Click to enlarge)
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 29 “Launch Pad” Chart Patterns
Lower Highs Series
Lower Highs Series
A series of lower highs are a common topping out pattern. This pattern is as it sounds – the stock or market index makes a series of lower highs. Sellers are in control of the stock and the price cannot make a new high. The chart below shows a series of lower highs.
Chart courtesy of Stockcharts.com (Click to enlarge)
In the chart above, the red 200 day moving average provided resistance to higher prices. This is also a sell signal.
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Death Cross
A market that breaks below the 50 and 200 day moving averages is usually already under selling pressure. Once a death cross appears (the cross of the 50 and 200 DMAs) selling may intensify as traders and market participants see this as a bearish selling indicator.
Look at the long-term Dow chart below. Once the death cross appeared in January 2008, the market stayed under the moving averages through the final plunge to new lows in March 2009.
Chart courtesy of Stockcharts.com (Click to enlarge)
Notice in the above chart that the 200 DMA (the red line) provided resistance to the upward price move in May 2008. After two attempts in May 2008, the price was not able to get above the 200 DMA, providing further fuel for a decline in prices.
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 31 Summary
Summary
You've learned about the six most common chart patterns: the cup with handle, cup, saucer, W bottom/ double bottom, V bottom, and the flat base.
You've also learned how these patterns form bases, and how these bases stack on top of each other as a stock moves up over the months and years.
And finally, I’ve covered how to spot sell signals that may develop in a stock. The head and shoulders pattern, lower highs pattern, and death cross are all patterns that can signal the end of a stock’s run.
Use what you’ve learned here to make the most of your investing dollars! These patterns work!
Best of luck!
Michael Benghiat
______Investor’s Guide To Buying Stocks Using ‘Launch Pad’ Patterns Page 32 Want To Learn More?
Please check out my Ultimate Stock Investing System
You’ll learn everything you need in order to become a successful stock investor!
Please visit: www.lifetimeinvestor.com for more details
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