Page 1219 - How to Make Money in Stocks Trilogy

202 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

• Wide and loose, volatile trading action

China Sky One Medical – 2009 Huge sell-off on big volume Price 22
Weekly Chart week after attempted breakout
19
17
15
14
13
12
11
Relative strength line 10
mirrors stock’s 9
Avoid “Wide & Loose” Bases volatility 8
Look for tighter, more controlled
trading. Bases with many big, 7
volatile price swings are more
likely to fail. Wide weekly price swings: Biggest volume
Many closes at bottom of range in months
© 2013 Investor’s Business Daily, Inc.
Volume
920,000
560,000
340,000
200,000

Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09
Compare China Sky’s wide and loose action to the tighter, healthier trading
in the chart for Financial Engines we saw earlier in “Signs of Institutional Buying.”

Beware of Late-Stage Bases

Nothing goes up forever.
As we saw earlier, the big money is made in the early stages—usually the
first 1–2 years—of a new bull market. That’s when the prior bear market has
wiped the slate clean, and a new crop of leading stocks break out from a
chart pattern and soar higher.
As they continue to climb higher, these stocks will likely take a breather
and form another chart pattern along the way—maybe a flat base. That
would be a second-stage base.

The Reset Button
Generally, a bear market resets the “base count”—the number of chart pat-
terns the stock has formed since the start of its big run. So the first breakout
in a new bull market is considered a first-stage base. Note: Milder “interim
corrections” do not reset the count (Big Rock #1, Chapter 3).