MarketSmith Pattern Recognition Users Manual

Transcription

1 MarketSmith Pattern Recognition Users Manual Pattern Recognition spotlights any of seven existing or emerging base patterns on MarketSmith Daily and Weekly stock charts. Learning to identify these base patterns adds an important aspect of technical stock analysis to your most important investment decisions, particularly optimum buy and sell points. Pattern Recognition also displays data points related to the highlighted pattern, including the base count, depth of base, pivot point, and much more.

2 Using Pattern Recognition TURNING ON PATTERN RECOGNITION Pattern Recognition On Turn on Pattern Recognition by clicking the Pattern Recognition icon in the Chart Toolbar. Pattern Recognition will automatically display base patterns on Daily and Weekly stock charts. (Not all charts will have base patterns.) Note: Pattern Recognition is not available for index, industry group, futures, or mutual fund charts. Pattern Recognition Off VIEWING BASE PATTERN PROPERTIES Pattern Recognition includes base properties in a hover box to help you effectively analyze the quality of a base. To view the hover box, place your cursor on the base pattern. BASE PATTERN TYPE Available base patterns: Cup, Cup with Handle, Saucer, Saucer with Handle, Double Bottom, Flat Base, Ascending Base, Consolidation and IPO Base. marketsmith.com (800)

3 Using Pattern Recognition STAGE It is important to know where a stock is positioned in relation to the number of bases it has formed. Stages begin at one and increase with each subsequent base pattern formed. Stocks emerging from third, fourth, or later stage bases are late in their moves and may be more likely to fail. Breakouts from first and second stage bases generally have a higher probability of success. 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 RESET The Base Stage and Count are always reset to 1 when an intraday low price undercuts the low of the previous base. Currently, this is the only scenario that resets the base count. marketsmith.com (800)

4 Using Pattern Recognition 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. At this time, the Pattern Recognition software does not take into account bear or bull markets when counting bases. Note: IPO Bases do not display either Stage or Count, as neither is 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 Double Bottom, the Pivot corresponds to the top of the middle peak of the W shape. 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) up 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. marketsmith.com (800)

5 Using Pattern Recognition PULLBACKS 1, 2, 3 (ASCENDING BASE ONLY) The depth (percent decline) of each pullback as a part of an Ascending Base. Measured from the left side high of each pullback to the bottom (intraday low). X X % 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. X X % 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 be blue. If the stock s current price is less than the pivot, the % from Pivot will be 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) to fully capitalize on what may be a true winner. marketsmith.com (800)

6 Using Pattern Recognition 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 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 Profit Target Range is 20% to 25% above the pivot point and identified by green highlight. When a stock is purchased at the original breakout, this is a range to consider taking an initial profit. 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. Key Price Ranges can be enabled or disabled in the Chart Tools Menu. marketsmith.com (800)

7 Using Pattern Recognition 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 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. BREAKOUT DAY HOVER: Placing the cursor over the pattern on the chart will cause a window to appear that includes the Price % Change and the Volume % Change, as measured against the 50-Day Moving Average on the day of the stock breakout. The breakout day is the day where the price trades above the pivot price and will only appear on a Daily chart. HIGHEST VOLUME: The highest volume in a day or week from the initial base is marked with an orange parachute icon. (The initial base always has a Stage and Count of 1.) If a subsequent day or week has higher volume, without a new stage 1 base, the highest volume icon will move to that new day/week. After a long move from Base 1(1), the final top might occur on the heaviest volume day from the beginning of the advance. If the highest volume occurs early in the move and coincides with constructive price action, this activity could be a sign of strength. marketsmith.com (800)

8 RS LINE NEW HIGH The RS Line becomes highlighted when it reaches a new 52- week high during the building of a base or during a breakout day/week. CLOSING RANGE The closing range for each periodicity will appear in the Track Price Tool, which is activated by a left click anywhere on the chart. The closing range is calculated as the percentage difference between the closing price and the high price of the day. For example: If a stock s daily closing price is the high price for that day, then the daily Closing Range will be 100%. The Closing Range is calculated as the (Close - Low) (High - Low). marketsmith.com (800)

9 Seven Base Patterns CUP WITH HANDLE & CUP WITHOUT HANDLE Looks like the silhouette of a cup with a 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 pointed V. The U shape indicates that the stock proceeded through a natural correction, and so 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, partly because 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 chances of a failed breakout. 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 largecap stocks. Saucer With Handle patterns last at least 18 weeks, with depths less than 25%. When no handle occurs, the pattern is marked simply as a Saucer. marketsmith.com (800)

10 Seven Base Patterns DOUBLE BOTTOM: Its shape resembles the letter W, but the second bottom of the W must undercut the first bottom. A Double Bottom can last from 7 to 65 weeks, with depth ranges from 10% to 50%. The pivot point is located on the top right side of the W, where the stock is coming up after the second leg down and reaches a price equivalent to the top of the middle peak of the W. 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 This price pattern is 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 is 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% and 25%. marketsmith.com (800)

11 Seven Base Patterns CONSOLIDATION An area of resistance failing to exhibit the qualities of either a Cup With Handle or any other defined base. IPO BASE This pattern is a relatively short and shallow area of consolidation that occurs immediately or soon after a company s initial public offering (IPO). Given their inherent youth, IPO Bases last only from 2 to 5 weeks, with a depth range from 0% to 40%. Stocks with recent IPOs, while generally riskier, may occasionally be attractive investments especially if they exhibit this pattern. marketsmith.com (800)

12 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. marketsmith.com (800)