How To Recognize Great Performing Stocks >>

Your guide to spot the double bottom chart pattern.

#2 in a Series of 5
 How to Recognize Great Performing Stocks
In this 16-page booklet, you will continue your education on be-
coming a better investor and achieving financial freedom. Investors
Business Daily is designed to make sure youve got the right stocks
on your radar. Chart reading is all about making sure you are buying
those stocks at the right time.

Youve heard the saying, timing is everything. Thats especially

true in the stock market. Buying at the right time, is the first step in
how you handle your stock. If you dont buy it right, chances are
your holding and sell decisions wont be right either.

So, how do charts help you? By looking at the price and volume,
you get insight into the psychology of investors. After careful study,
you will find the same patterns appear over and over throughout
time. In fact, our database has examples of stocks from the 1890s
that formed patterns similar to those in the last few years. The rea-
son for the similarity is simple, human nature rarely changes.

Although we focus on chart patterns in this series of pamphlets,

remember its only one part of the equation. You must also have
strong fundamentals behind any stock youre thinking of buying...
Stocks with significant percentage increases in their recent quarterly
earnings per share and sales growth and a high return on equity.
These strong fundamentals will usually be due to a new product or
service, or an important change in industry conditions. The point is,
you have to know a good deal about the company and its prospects
before committing your money to it as an investment.

The Double Bottom Pattern

Old high
% 0
st 3

Buy point occurs when the stock clears

the middle of the W on heavier than
t lea

normal volume, usually at least a 50%

of a

increase above average.

nd
ptre
eu

- Depth % -
pric

Second bottom should

r

slightly undercut the

Prio

first bottom.

The base correction

tends to be more severe
but still usually corrects
no more than 40% from
the peak (left side).
Base Length - base should occur over at least 7
weeks, but can last longer.

2
After the Cup-With-Handle, the second most common highly suc-
cessful chart pattern is named the Double Bottom. It is easy to iden-
tify as it simply looks like the letter W. The only difference is the
second leg of the W should go a little lower than the first. This acts
as a shakeout of weaker investors.

The pivot, or buy point of the double bottom is just as the stock
surpasses the middle of the W as its coming up from its second
bottom. In some cases, a double bottom may form a handle area,
in which case the buy point will be 10 cents above the high of the
handle, just like the cup-with-handle.

You should use this pamphlet to get a solid idea of what past dou-
ble bottom patterns looked like, so you can recognize this pattern
in stocks during future market uptrends. Its also important to re-
member that 90% of the time these patterns form when the general
market is in a correction, when you are least likely to be thinking of
what your next investment should be.

As always, you can see more educational examples in Investors

Corner in IBD. Plus, visit our web site, Investors.com to view more
samples in the education section and video examples in the Daily
Stock Analysis.

The chart on the next page gives you definitions of key features
included in IBD chart examples. You can use it as an additional
reference as you go through this booklet.

We look forward to helping you become a more successful investor.

William J. ONeil

3
4

Weekly Chart
Novell Increased 373% in 61 Weeks
Double bottom description:
Point A = beginning of base pattern
Point B = bottom of first leg S&P 500 correction
Point C = middle of W which sets the buy point 10-week moving
Point D = bottom of second leg average line
Point E = buy point
Thin gray line means stock
closed at a lower price than Base formed during
Thick black line means stock closed at prior weeks close market correction.
a higher price than prior weeks close 200-day moving
average line
High
E
Close
A
Low C
Relative Price Strength Line
vs. S&P 500. Uptrending line
means stock is outperforming
S&P 500.
B
D All chart prices are adjusted for stock
splits shown just above the weekly
volume bars. So, the actual price of this
16-week double bottom stock at buy point E would have been
$28 at the time, not $14.
Stock splits

Average weekly
Weekly volume bars volume line

Copyright 2008 Investors Business Daily, Inc. All rights reserved

 Delta Air Lines Increased 966% in 197 Weeks
Entire airline group became a market leading sector
in early 1960s due to introduction of jets which
reduced travel time. This was one of the first stocks
making new price highs when the new bull market
began after the Cuban Missile Crisis ended.

Market correction

Note 2nd bottom at point D undercuts 1st

bottom at point B of the double bottom pattern
but stock closes relatively unchanged for week
on increased volume.

E
Buy point

A
C
Prior uptrend 3 weeks tight closing prices
form the handle area.
B D
10-week double bottom
with handle

Copyright 2008 Investors Business Daily, Inc. All rights reserved

5
6

Syntex Increased 1173% in 42 Weeks

Climax top
A 26% correction in the market Sell
Double bottom pattern looks like the letter W. led to a steeper 62% correction
in this double bottom.
Almost always, the second bottom at point D should
go a little below the first bottom at point B creating a
shakeout right at the very bottom.
Weekly chart prices are split adjusted for a 3 for 1
stock split of November 1963. This is a high tight flag
pattern buy point
Syntex had a new product...the birth control pill.

The 3 quarters before buy point E, Syntex had

EPS growth of +400%, +800% and +400%! A
E
Prior Buy point
uptrend
C

Big volume
up weeks
B
D

54-week double bottom

Volume
Increases

Copyright 2008 Investors Business Daily, Inc. All rights reserved

 Amgen Increased 688% in 96 Weeks Stock went up another 723% before it topped in
July, 2000 for a total return of 6,385% in 10 years

Base formed during

market correction.
At the buy point:
Last 3 quarters EPS:
+250%, +1000%, +4400%
Last 3 quarters sales:
New issue in 1983 +55%, +98%, +216%
Note: many stocks that make huge After-tax margins at their peak.
price gains are entrepreneurial compa- E
nies that had recently become public. Buy point
According to our studies, 75% of the
biggest winners were new issues at A
some time in the 8 years prior to their C
big moves.

B
D

16-week double bottom

Big volume shakeout, but stock

closes mid-range showing support.

Copyright 2008 Investors Business Daily, Inc. All rights reserved

7
8

Cognizant Tech Increased 717% in 193 Weeks

At the buy point: New issue in 1998, another
Pre-tax margins were 20% example of an entrepreneurial
Return on equity was 27% company

Base was forming as market

was coming out of 2000-2003
bear market decline.

E
Buy point
A
C

Note: stock pulls back into buy area,

B normal for some breakouts.
D

23-week double bottom with handle

Copyright 2008 Investors Business Daily, Inc. All rights reserved

 Franklin Resources Increased 168% in 16 Weeks

Climax top
Sell

Market correction.
E
Buy point
At the buy point:
Last 3 quarters EPS: A
+100%, +110% to +145% C
Last 3 quarters sales:
+58%, +70% to +90%
Return on equity: 83% B
Pre-tax margin: 38% D

11-week double bottom

New issue in 1983 -

example of an entrepreneurial
company

Volume growth

Copyright 2008 Investors Business Daily, Inc. All rights reserved

9
10

EBay Increased 282% in 115 Weeks

New issue in 1998 - example of

an entrepreneurial company

At the buy point:

Last 2 quarters EPS: Base formed during bear market Another buy
+58%, +83% and eBay bottomed at the same point
Last 2 quarters sales: time as the market.
+47%,+49%
Return on equity: 41%
Pre-tax and after-tax margins E
were both at their peak Buy point
9-week double bottom
A C

Normal buy point off a double bottom is when stock exceeds

B D price peak at Point C (the middle of the W).
A slightly early buy could be when stock price exceeds the
downtrend line drawn on the chart.
16-week double bottom Jesse Livermores 3-point buy rule was...buy if a stock breaks
below a prior low at point B ($25.52) as this stock did at point
D and then reverses back above the $25.52 low by 3 points to
$28.52. This shows a shakeout happened and marks a new
uptrend and buy point at $28.52.

Copyright 2008 Investors Business Daily, Inc. All rights reserved

 C M E Group Increased 224% in 113 Weeks
New issue in 2002 - example
of an entrepreneurial company

Base formed during

market correction.
At the buy point:
Last 2 quarters EPS:
+89%, +51% E
Last 2 quarters sales: Buy point
+46%, +23%
Return on equity: 32% A
C 5 weeks in a row stock
Pre-tax margins 49%
40 new mutual funds purchased increases in price.
this stock in March 2005 quarter.
B
D
21-week double bottom

Copyright 2008 Investors Business Daily, Inc. All rights reserved

11
12

Cisco Systems Increased 2457% in 177 Weeks

This all-time classic double bottom

eventually went up another 3,522%
from this point to its March 2000 top,
for a total return of over 92,512% in
At the buy point: Base formed during under 10 years.
Last 2 quarters EPS: market correction.
+112%, +133%
Last 2 quarters sales:
+150%, +155%
Return on equity: 36%
Pre-tax margins and after-tax
margins were at their peaks.

New issue in 1990-another E Chart prices are all adjusted for sev-
example of an entrepreneurial Buy point eral 2 for 1 stock splits, so dont think
company Cisco was $1.90 at the buy point. At
A the buy point it was actually $27.
C Pullback into buy area.

13-week double bottom

B
D

Copyright 2008 Investors Business Daily, Inc. All rights reserved

 Price Club Increased 1074% in 211 Weeks
At the buy point:
Return on Equity was 55%
Company had 2 warehouse stores in
San Diego. Much later they merged
with Costco. Sams Club was also
later copied after Price Clubs.

Double bottom base formed

during market correction.

E
Buy point
A
C

Huge volume demand

B is way above average
D volume line.

Double bottom with handle

Copyright 2008 Investors Business Daily, Inc. All rights reserved

13
14

N V R Increased 418% in 192 Weeks

Entire home builders group goes up
as interest rates continue dropping.

Although this move started during

the long 2000-2003 bear market, the
breakout did occur during a short rally
after a follow-through day in the market
averages which signaled a new uptrend.

E
A Buy point
C

B
D
27-week double bottom 8 weeks in a row stock
closes up in price.

Copyright 2008 Investors Business Daily, Inc. All rights reserved

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How To Recognize
Great Performing Stocks
Your guide to spot the double bottom chart pattern.

2008 Investors Business Daily, Inc.

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