MarketSmith Pattern Recognition

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1 MarketSmith Pattern Recognition Users Manual Pattern Recognition spotlights six unique base patterns on MarketSmith Daily and Weekly stock charts. The six base patterns support a growth investing approach and provide instant recognition of patterns that may otherwise go unseen. Consistent use of this feature will assist you in technical stock analysis and the establishment of proper buy and sell points. In addition to identifying the specific base pattern, Pattern Recognition also displays the base count, depth of base, pivot point and much more.

2 Turn Pattern Recognition On Pattern Recognition On To activate Pattern Recognition, click the Pattern Recognition icon above the chart in the Chart Toolbar. Pattern Recognition will automatically display base patterns on Daily and Weekly stock charts. Please Note: Pattern Recognition is not available for index, industry group or mutual fund charts. Pattern Recognition Off Viewing Base Pattern Properties Pattern Recognition includes base properties to help you effectively analyze the quality of a base. To view the properties, place and hold your cursor over the base pattern. Base Pattern Type Available base patterns: Cup, Cup with Handle, Saucer, Saucer with Handle, Flat Base, Ascending Base, Consolidation and IPO Base

3 Stage It is important to be aware of where a stock is in relation to the number of bases it has formed. Stocks emerging from third, fourth or later stage bases are late in their moves and may be more likely to fail. On the other hand, breakouts from first and second stage bases generally have a higher probability of success. Stages begin at 1 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 (i.e. from Stage 1 to Stage 2). If the price move is less than 20%, the stage will increase by an alphabetic factor (i.e. from Stage 1a to Stage 1b). Base Reset The Base Stage and Count are always reset to 1 once an intraday low price undercuts the low of the previous base. Currently, base resets do not take into consideration market conditions

4 Count The Count is the number displayed in ( ) to the right of the Stage. Count begins at 1 and increases numerically with each new base pattern, regardless of the magnitude. It is the raw count of the number of bases since the last reset. Note: IPO Bases do not display either Stage or Count as neither are applicable for that particular pattern. Pivot The Pivot is indicated for each base. This value corresponds to the dashed Pivot Line. The raw value is marked without any additional amount added (e.g. 10 cents). The Pivot of a base corresponds to a previous area of resistance. In the case of a Cup (or Saucer) with Handle, it corresponds to the peak price of the handle. In the case of a Cup, Flat Base, Consolidation or IPO Base, the Pivot corresponds to the Left Side High that began the base. When a stock breaks above this level of resistance, it may be poised to move higher. Length The length (in days or weeks) of the base is measured from the first day the pattern begins (left side high) to, but not including, the breakout day. If a base pattern exceeds the maximum allowed length of time without breaking out, the pattern ceases but remains on the chart and a (max) label is added. Depth The percent decline from the start of the base (left side high) to the bottom (intraday low) of the base. Handle The percent decline from the left side high of the handle to the bottom (intraday low) of the handle

5 Pullbacks 1, 2, 3 (Ascending Base Only) The depth (percent decline) of each pullback as a part of an Ascending Base. The percent decline from the left side high of each pullback to the bottom (intraday low). % to Pivot Once a pivot point is determined, the % to Pivot maintains the % difference between the stock s current price and the pivot point. As the base develops, the % to Pivot is displayed in black in the top right corner of both Daily and Weekly charts. % from Pivot The % from Pivot displays the % difference between the current price and pivot point in addition to the number of days or weeks (depending on whether you are viewing a Daily or Weekly chart) since the pivot was achieved. If the stock s current price is greater than or equal to the pivot, the % from Pivot will show in blue. If the stock s current price is less than the pivot, the % from Pivot will show in magenta. Power from Pivot Flag Stocks advancing in price 20% or more within 15 days (3 weeks) of the pivot point are marked with the Power from Pivot Flag. This type of powerful action following the breakout from a well formed base may indicate that further strength can be reasonably expected. Under this circumstance, investment legend William J. O Neil encourages investors to consider holding the stock for at least 8 weeks (from the pivot) in order to capitalize on what may be a true winner. Note: The Power from Pivot Flag does not apply to IPO Bases

6 Key Price Ranges The Profit, Pivot, and Loss Ranges are determined from the pivot point for the most recent base. This is a quick and easy way to identify ideal trading zones. The Profit Target Range is 20% to 25% above the pivot point and identified by green highlight. In the instance when a stock is purchased at the original breakout, this is a range to consider taking an initial profit. The Pivot Range is 0% to 5% above the pivot point and is highlighted in blue. Generally, this area is where an investor would ideally make an initial purchase. The Loss Range is 5% to 8% below the pivot point and highlighted in pink. This range represents where investors may want to cut a losing position. Key Price Ranges can be enabled/ disabled in the Chart Tools Menu

7 Tight Areas Tight areas can often be a sign of strength within a chart. Tight areas are highlighted blue on Weekly charts when the closing price for at least three consecutive weeks is within a 1.5% +/- band. Tight areas can be a sign of strength in a price chart. They also serve as alternate entry points for adding to an existing position or establishing a position when an initial breakout is missed. Tight Areas can be enabled/disabled in the Chart Tools Menu

8 Six Base Patterns Cup with Handle & Cup without Handle Looks like the silhouette of a cup with handle when viewed from the side. It is one of the most prevalent bases identified by MarketSmith Pattern Recognition. In most, but not all cases, the bottom of the Cup should be rounded, like a U rather than a narrow V. The U shape indicates that the stock proceeded through a natural correction, and will have a better probability of success following its breakout. As the stock approaches new highs (completing the right side of the cup), it will often pull back and have one last shakeout before advancing further. This represents the handle area of the base. Cup with Handle patterns can last from 6 to 65 weeks with depths ranging from 8% to 50%. Cups without handles have slightly higher failure rates, due to the fact that they do not experience a final shakeout before their breakout. Those investors normally shaken out during the development of a handle sell after the breakout, thus increasing the chances that the breakout fails. However, there are some Cup patterns that do advance successfully without forming a handle. When no handle occurs, the pattern is labeled as a Cup. Cup without Handle patterns can last from 6 to 65 weeks with depths ranging from 8% to 50%. Saucer with Handle & Saucer without Handle Similar to a Cup with Handle, the Saucer with Handle tends to develop over a longer period of time and exhibits less depth. The Saucer with Handle is more typically found among large-cap stocks. When no handle occurs, the pattern is marked simply as a Saucer

9 Six Base Patterns Flat Base Generally moves sideways within a relatively narrow price range. Flat bases often occur after a stock runs up after breaking out of one of the other chart patterns. Flat bases form over a 5 to 65 week range. The minimum depth is 0% with a maximum of 15%. Ascending Base A price pattern characterized by three pullbacks in price with the low of each pullback higher than the low of the preceding pullback. Like Flat Bases, this pattern often occurs after a stock breaks out of an initial base and are almost always caused by a short-term general market sell-off. Ascending Bases develop over 9 to 16 weeks with each of the three pullbacks correcting between 6% to 25%. Consolidation A basing area of resistance that is not currently identified as a cup or saucer, and is too deep to be a flat base. IPO Base A relatively short and shallow area of consolidation that occurs immediately or soon after a company s Initial Public Offering (IPO). IPO Bases can last from 2 to 4 weeks with a depth range from 0% to 20%. While generally riskier, stocks with recent IPOs may occasionally be attractive investments. Given their inherent youth, IPO bases generally occur over shorter time frames

10 Pattern Recognition Dictionary Left Side High The starting point of the pattern. In most cases, it is the highest intra-day price over the last 100 days (or 20 weeks) for daily (or weekly) charts. Length The minimum and maximum number of days (weeks) needed to qualify as a pattern. The minimum and maximum values will vary across patterns. For example, the Cup with Handle pattern needs a minimum of 30 days (or 6 weeks) of data for daily (or weekly) charts. Depth The maximum percent change from the left side high to the bottom (lowest intra-day low) of the pattern. The minimum and maximum values will vary across patterns. For example, Cup with Handle maximum depth is 50% while the Flat Base maximum is 15%. Results obtained from our Pattern Recognition tool are hypothetical and may vary with each use and over time. Past performance of a security does not guarantee future results or success