Basics of Stock Chart Patterns

The cup with handle is the most common and probably the most important pattern. William J. O'Neil's research found that the following are the most common characteristics of the cup with handle pattern.
- The length can last from 7 weeks to 65 weeks.
- The typical length is 3 to 6 month.
- A correction from the top of the cup (absolute peak) to the bottom of the cup is from 12% to 33%.
- It should have a clear prior price uptrend of at least 30%.
- The prior uptrend should have a significant increase in trading volume.
- The bottom of the cup should be rounded in the shape of a U rather than a V.
- The handle should be at least a week long.
- The handle should have a downward price drift (also called a shakeout).
- The handle should be above the stocks 10 week moving average line.
- The handles price drop should be within 8% to 12% of its peak.
The aforementioned guidelines are for cup with handle patterns with the least probability of failure and the greatest probability of success. The pattern can be successful outside of these guidelines but it will be a risky one and may fail.
The buy point of the cup with handle is 10 cents above the high point in the handle. On the day the stock charges through this point it should have at least a 40% increase in its trading volume over its average.

This pattern is similar to a cup with handle except it stretched out over a longer period of time making the patterned shallower. The buy point is the same as with a cup with handle

This pattern looks like a "W." Its second bottom should match or undercut the first bottom by a few points. The second bottom shakes out the weaker investors like the handle in a cup with handle. The buy point is on the top right side of the W. The price is equal to the top of the middle peak of the W. Double bottoms can and often do have handles. All the same rules as a cup with handle pattern apply.

Sign up for Investors Quotes Daily a free daily quote from investor William J. O'Neil. A great way to learn from the best and stay encouraged in your pursuit of being a successful investor.

SIGN UP FOR FREE HERE

These are second stage bases (bases that form after a primary base such as the cup with handle). According to O'Neil a "flat base usually occurs after a stock has advanced 20% or more off a cup with handle pattern". They move straight sideways in fairly tight price action. This will last at least five weeks and the stock will break out on increased volume.

This pattern lasts 4 to 7 weeks and corrects around 10 to 15%. As you might expect it looks like a box.

This is a rare and risky pattern which is hard to identify but it can be very lucrative. It is a second stage base and usually occurs after a stock has made a fast advance on the order of 100%. It then moves sideways correcting 10 to 25% in a few weeks and then continues its advance. The buy point is 10 cents above the highest point in the pattern.

These are also second stage bases. They will have two or three pullbacks with each low point higher than the previous one. Look for a large volume increase to signal the buy point.

That is a good general introduction to chart patterns. If you're looking for more information I would recommend William J. O'Neil's book How to Make Money in Stocks. This goes into depth on all of these chart patterns and gives literally 100 historical charts of stocks emerging out of bases. It is a great way to get familiar with reading charts. Below are some additional resources I would recommend on the topic.

- If you like William J. O'Neil sign-up for INVESTORS QUOTES DAILY . They send out a FREE daily quote from William J. O'Neil. Sometimes it's one of his investing strategies and other times a piece of sage wisdom but it's always a great piece of knowledge on being a successful investor.
- A great source of current leading stocks and their charts with accompanying research is the newspaper INVESTORS BUSINESS DAILY. I use it myself and it is a huge time saver as they sort and compile data that would take me hours if not days to put together. If you want more information CHECK OUT MY REVIEW HERE
.