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Is this a market correction or simple consolidation?

The late William J. O’Neil, a renowned investor and founder of Investor’s Business Daily (IBD), shared valuable insights on making money and limiting losses in the stock market.

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Surviving a Market Correction

Let’s explore one of his key lessons:

Cut Losses Quickly:

In his book, Making Money in Stocks, O’Neil stressed the importance of managing losses, especially in a market correction. If a stock isn’t performing as expected, exit promptly. This lesson is timely, as the markets pulled back this week on above average volume.

“The whole secret to winning and losing in the stock market is to lose the least amount possible when you’re not right.”

The stock market suffered sharp losses in the past week, potentially starting a market correction in the process. The Dow Jones actually rose a fraction. But the S&P 500 and Nasdaq composite plunged below their respective 50-day moving averages, suffering their worst week in more than a year.

Technology stocks were the biggest losers. Nvidia (NVDA), the ultimate AI stock and company, accelerated below key support.

Semiconductor and AI stocks sold off on cautious comments from ASML (ASML) and Taiwan Semiconductor Manufacturing (TSM).

AI darling Super Micro Computer (SMCI) got smoked on Friday, raising fears about AI demand overall.

Cup and Handle Market Correction SPX

Follow Trends and Market Direction:

Pay attention to market trends. The chart of SPX above might be forming the left side of a base. The chart is illustrating a bearish trend, so stay clear until the base becomes obvious.

Invest in stocks that align with the prevailing market direction.

Tech stocks fell in unison, so it’s best to stay away from these stocks until solid patterns form. Oil and gas stocks on the other hand illustrated remarkable strength, so this is one area to explore next week.

A simple consolidation should stop soon, with a modest 5% drawdown. That said, we need to remain vigilent, as the current weakness could turn into a 10% market correction very quickly. A week of solid price action on above average volume is what we would look for int the latter half of April 2024.

If the equity markets manage to build a base over the next few weeks, we would suggest looking for the most common patterns to reveal themselves. Some patterns have already appeared in the finance sector, with American Express (AXP) breaking out of a base on Friday.

American Express breakout zone<br />
market correction

Look for more of these stocks to break out, while monitoring our Live Broadcast and alerts channels that we offer at The Closing Print everyday of the week.

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Three “Money Making” Patterns

Winning Stock Patterns<br />
Market Correction

The Cup and Handle pattern is arguably the most well-known chart formation used in technical analysis.

It was discovered by the famous trader William J. O’Neil, who founded the stock brokerage firm William O’Neil & Co. Inc. Let’s delve into the details of this pattern:

The Cup and Handle pattern resembles a teacup with a handle.

It occurs after a strong uptrend.


How to Trade the Cup and Handle Pattern:

The pattern consists of two parts:

The Cup: This forms as the stock price retraces and creates a rounded bottom (similar to a cup).

The Handle: After the cup, there’s a consolidation period where the price retraces slightly (the handle).

WHD Oil and Gas Sector<br />
Market Correction Relative Strength

In the example above, Cactus CI A, (WHD) is an oil and gas stock currently forming  “a handle.”

The oil and gas sector is strong despite market weakness. Current price illustrated in the chart above remains bullish.

When building your watch list, focus on stocks with an 80 or higher RS “relative strength’ rating. Cactus Cl A (WHD) met that criteria recently with a new score of 82. It has since backed off to 79 as it forms a handle.

This exclusive rating from Investor’s Business Daily tracks market leadership with a 1 (worst) to 99 (best) score. The grade shows how a stock’s price movement over the last 52 weeks compares to all the other stocks in our database.

History shows that the top-performing stocks often have an RS Rating north of 80 in the early stages of their moves.

While we are not recommending the stock, the pattern is prevalent. It was also picked up and indicated on the chart by MarketSurge algorithms. You can try MarketSurge for $1/day – link here:

The goal is to identify this pattern and buy shares as they exit the handle, anticipating further upside.

Step #1: Identify an Uptrend and a Rounded Retracement (the Cup)

Look for a longer-term uptrend in the stock. The current uptrend in SPX  completed as it topped in March.

Wait for the rounded retracement (the cup) to form.

Step #2: Draw the Handle

The handle is a smaller consolidation within the cup.

It usually retraces less than one-third of the cup’s depth.

Step #3: Entry Points

Enter the trade after the handle breakout.

Alternatively, consider a second entry at the first cup peak breakout.

Step #4: Take Profit

Measure the distance from the initial cup peak to the bottom of the cup. This gives us the “measured move.”

Set your profit target at the same distance from the breakout point using the “measured move” distance as a rough guide.

Step #5: Set Stop Loss

Once the cup start to bottom, place a stop loss below the rounded bottom.

After and when the index or stock rallies back to its peak, we can take a second entry, as the stock breaks out and stop losses below the handle’s swing low.

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How to Trade the Double Bottom Pattern:

The “W” pattern, also known as the Double Bottom, is a reversal pattern.

It occurs after a downtrend and consists of two troughs (bottoms) that resemble the letter “W.”

Key points:

The first trough (bottom) forms as the price declines.

The second trough occurs at a similar level or slightly higher.

The pattern confirms when the price breaks above the middle peak.


Winning stocks "W" "Double Bottom" Market Correction

Traders often interpret the “W” pattern as a signal that the downtrend may reverse, leading to potential bullish movement.

In summary, while O’Neil’s primary focus was on the Cup and Handle pattern (not the “W” pattern), both patterns offer valuable insights for traders. Remember to consider the broader market context and apply these patterns within a well-defined trading strategy

How to Trade the Flat Base Pattern:

Winning Stocks Common Patterns Flat  - Market Correction

One of three positive chart patterns to look for when doing technical analysis. It usually occurs after a stock has advanced off of a ‘cup with handle’ or ‘double bottom’ pattern. 

The ‘flat base’ moves straight sideways in a fairly tight price range for at least five weeks and does not correct more than 10% to 15%.

Based in Phoenix, the company has over 400 grocery stores in 23 states. It aims to offer wholesome selection of organic, plant-based and gluten-free products.

Sprouts Farmers Market (SFM) is poised to launch a new breakout.

market Correction Patterns

Sprouts Farmers Market (SFMstock broke out from a flat base on Dec. 4, rising as much as 47% before coming off an all-time high in February to begin the current second-stage flat base with a 65.53 buy point. Sprouts moved back above its 21-day exponential moverage average line on Friday, its 50-day moving average remains in a clear and strong uptrend.

SFM stock closed the week 0.50 cents shy of lat base breakout. Watch for a follow through on above average volume for entry. We use a trailing ATR (1.5x) stop starting under the low of the day of entry.

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Join us today in the trading room for our LIVE broadcast during market hours, as we navigate the current environment using Investors Business Daily principles and strategies. Watch, listen, and trade from 9:20 AM to 4:15 PM Monday through Friday.

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Additional Resources

Swing Trader:


MarketSmith Stocks

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Leaderboard Stocks

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