Winning Stocks - 1 Surefire Strategy

Finding winning stocks before they make their most productive gains, is what we will discuss in this article. This strategy differentiates between range bound, basing stocks and winning stocks that are breaking out of bases and are just beginning to trend or have already started to trend.

Below is an example of a trending stock, with intermittent bases. Illustrations courtesy IBD

Our best results over the years have come mainly from stocks that are bought as price action breaks out of bases. These almost always follow a breakout of a cup and handle base, double bottom base aka “W” pattern, or a flat base. Trading inside of these patterns usually results in frustration and losses.

This simple paragraph was gleaned from the late William O’Neil’s book published in 1988, How to Make Money in Stocks. It’s made me and others a lot of money over the years.

Bottom line: buy when a stock breaks out of its base and starts trending.

Summary

Finding Winning Stocks Starts With Simple Patterns

When we search for winning stocks we focus on the three primary chart patterns. These are the most common and they consistently produce impressive gains in every market cycle.

By using stock charts to spot these bases, you’ll be able to get in early on the best stocks to buy and watch.

Start by getting to know these three common chart patterns and their optimum buy points.

Cup with Handle
Cup w/o Handle
Double Bottom
Flat Base

Cup With Handle Pattern

Cup and handle patterns are the most common, with price action initially hitting ressistance then fading back to support, creating the left side of the cup. Traders and investors see this price action. Some shorts start to cover, followed by new positions, forming the base and right side of the cup.

In most cases, price action comes back to the top of the cup, where some investors look to break even, forming a handle in the process. Once this selling dissipates, we look for the break out.

Targets are usually 20% from the breakout above the highest pivot. Some technicians use the depth of the cup as the “measured move” target.

Double Bottom “W” Pattern

Double bottoms are created when price meets resistance and retraces forming the first leg down. It is thought bears are in control. Bulls try to gain control, forming the next leg up, only to fail again. Bears take control and the process repeats.

The last leg higher completes the “W” pattern, with technicians watching for bulls to maintain control. This buying activity pushes price through the middle pivot of the “W” confirming at the “ideal buy point” with the stock surging on higher volume.

Flat Base Pattern

The flat base is similar to the “W” pattern above with the exception that normal price action fails to produce a “W” pattern, and instead stays “range bound.”

Winning Stocks Common Patterns Flat Base

In addition to chart patterns, we need to watch the volume on the day of it’s breakout. We want a stock price to close in the top half of the range for the day/week with the following in mind:

Big Price Gain In Heavy Volume: This confirms strong demand.
Large Price Gain In Light Volume: Potentially signaling a head fake, the stock has risen but a lack of volume shows uncertainty.
Big Price Decline In Heavy Volume: One down day doesn’t necessarily trigger a sell signal. But a significant decline in heavy trade over several days is a warning sign. It indicates that large investors are heading for the exits.
Small Price Decline In Light Volume: Below-average volume on a down day may indicate that large investors are generally holding on to shares in hopes of bigger gains. This scenario can emerge as a stock sets up a base or builds a handle.

Understanding price, volume, and the patterns they produce is essential to finding the next winning stocks for our portfolio.

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Happy Trading,

Vinny

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