How to Make Money in Stocks 2^nd edition 

Author: William O’Neil 

Summarized by Fernando Boccanera on 2005/8/1 – Version 1 

This summary is the personal opinion of Fernando Boccanera based on his reading of O’Neil’s book.  It is furnished to you as a fellow investor and not in any professional investment advisory capacity.  You should consult with a qualified investment advisor for specific investment recommendations suitable to your personal circumstances.

Individual investors

• Have advantages over institutions
• Can invest in only the very best stock
• Can get in and out at any time

Institutional Investors

• Can only buy companies with large supply of stocks, which usually under perform
• Are limited to a narrow set of stocks because of their stated strategy
• Can not move in and out of a stock quickly because of the size of their trades

CAN-SLIM Method in a Nutshell

• Buy only stocks of companies with superb growth, whose stocks are performing superbly.
• Buy and sell at the right time based on proven patterns

CAN-SLIM Method

C – Current Quarterly Earnings – The higher, the better

A – Annual Earnings Increases – Significant Growth

N – New products, new management, new highs

S – Supply and Demand – Volume drives demand

L – Leader or Laggard

I – Institutional Sponsorship – Follow the leaders

M – Market Direction 

C=Current Quarterly Earnings

• Research has shown that super performing stocks had substantial earnings in the quarter or two before a major price advance. 3 out of 4 best stocks over 40 years had earnings increase > 70% in the latest quarter compared to the same quarter the year before. The one in four that didn’t, did so in the very next quarter.
• EPS increase in the latest quarter should be at least 25%
• EPS increase in the latest quarters should show accelerating growth
• Next quarter EPS estimates
• At least 15%
• Increase should be more than latest quarter
• Sales growth should be acceleration and in-sync with EPS increase
• Signs of financial trouble:
• Large sales increase but low EPS increase might mean company:
• Issued shares (diluted)
• Took large charge
• One-time earnings
• Cost reduction measures

A=Annual Earnings Increases

• Annual EPS ideally should have increased every year for the past 3 years
• Latest annual EPS increase of at least 25%
• Next annual EPS increase estimate at least 15%
• IBD’s EPS rating measures EPS growth against all other stocks
• It factors the last 2 quarters and the last 3 years
• Historically, the best performing stocks had EPS rating > 80
• ROE at least 17%
• Annual cash flow per share = 25% > actual EPS
• IBD’s EPS stability < 25

N=New Products, new Management, New Highs – Buy point

Paradox: What seems too high in price to the majority usually goes higher and what seems cheap usually goes lower.

• Search for companies that have important new products or services, or that are benefiting from new management or new industry consolidation
• Stocks close to or making new highs after a consolidation show strength

S=Supply and Demand – Volume drives demand

• Supply and demand move the market, more important than any analyst opinion.
• Shares float = Total shares outstanding – shares closely held.
• Management should own > 2% of shares
• Look for companies buying their own stock back, EPS will grow.
• Low debt-to-equity ratio

L=Leader or Laggard

• Should buy leaders, number 1 in their particular field
• The leader:
• Is not the largest or the one with the most recognized brand name
• Is the one with the best quarterly EPS growth, ROE, profit margin, sales growth and price increase
• Avoid sympathy stocks, the ones you like for no good reason
• IBD’s relative price strength (RPS) rating:
• Measures price performance against all other stocks for the past 52 weeks
• Best performing stocks from 1950-2000 had RPS average = 87
• RPS at least 80
• Give preference to the top 2 or 3 stocks in an industry group  (leaders)

I=Institutional Sponsorship – Follow the leaders

• Institutions account for more than 70% of the activity in most leading stocks. They are the sustained force behind most important price moves.
• Too much sponsorship can cause a massive sell-off when a stock tops
• IBD’s SPON Rating measures institutional sponsorship. It ranges from A (best) to E.
• Look at quantity and quality of sponsorship
• At least 10 institutional owners
• Number of institutional owners should be increasing

M=Market Direction

Market Cycles and influence in stocks

• Bull markets
• Usually last 2-4 years
• Are followed by a recession or a bear market
• Bear markets
• Usually 3-6 months
• 2+years are rare
• No matter how good a stock is, 3 out of 4 stocks will plummet with the market
• Order of market recovery after a bear market:
1. growth stocks lead (new price highs)
2. turnarounds
3. basic industry groups and cyclical – steel, chemical, paper, machinery are last
4. when capital goods, machinery, railroad move up, the bull market is about to end

Bulls and Bears

• In bull markets, stocks usually open weak and close strong.
• In bear markets, stocks usually open strong and close weak
• Bull/bear markets usually end while business is still in an up/down trend. The reason is that stocks valuations anticipate future events. Use of economic indicators or even stocks fundamental indicators is useless because they lag.
• Bull and Bear markets don’t end easily.
• Usually it takes 2 or 3 pullbacks to fake out or shake out the few remaining speculators
• After everyone who can be run in/out has thrown in the towel, there isn’t anyone left to continue in the same direction.
• Only then the market finally turns and begins a whole new trend.

Spotting a Market Top

• Market is in a very strong uptrend
• Market goes up but volume decreases from the previous day
• Market goes down and volume increases from the previous day (distribution)
• Three distribution days in a week or 5 distribution days in 2-4 weeks is a clearly signal to:
• Stop buying new stocks
• Sell portion of some positions
• Market breaks 50-day MA on the way down:
• Sell all positions

Spotting a Market Bottom

• Market is in a downtrend
• Closes higher on volume higher than the day before (or volume above average). This is the first accumulation day of a possible rally.
• Market follows-through on the 4-10^th day: goes up 1% or more on volume higher than the day before and possibly higher than average

How to Pick and Time Stocks 

In order to select a stock and then time it, two types of analyses are necessary: fundamental and technical. Fundamental Analysis measures the performance of the company’s finance while Technical Analysis measures the performance of the stock.  

Charts

In the CAN-SLIM method, technical analysis is done mostly on price and volume charts. IBD uses two bar charts: daily and weekly. The bottom of the price bar is the lowest price for the period (day or week), the top is the highest price and the small horizontal line is the closing price. The charts also show the 200-day and the 50-day moving averages. 

Volume

Volume is the best measure of supply/demand and institutional sponsorship. Big volumes move stocks.  

Timing

• Only buy stocks that:
• Have the highest RPS and EPS ratings
• Are performing better than the general market
• Are beginning to emerge from sound base-building periods
• Break resistance lines
• Time to sell:
• Advances rapidly
• Too extended from the base
• Showing extremely high RPS

Resistance

• Is an upper price boundary that stocks have difficulty breaking
• Exists because institutional investors who made prior purchases at resistance level prices sell to break even when the price approaches their buy point
• Overhead supply
• Supply of stocks bought around resistance price
• Can be sold when price approaches resistance level
• Better to buy after price breaks resistance level (breakout)
• Proves that there is sufficient demand to absorb overhead supply sales

Support

• Opposite of resistance
• Institutional buying

Chart Patterns 

Definition: Price correction is a price drop of at least 10%. A healthy market will correct from time to time.  

Definition:  Price consolidation is the movement of a stock price within a well-defined range (upper and lower boundaries.  

Chart patterns, also called bases, are areas of price correction and consolidation after an earlier price advance. The price uptrend prior to the base should be clear and definite and have appreciated at least 30%. Many stocks will surge after breaking out of the base.  

Reasons for corrections

• General market decline
• Sector out of favor
• Company conditions changes (bad news, miss expectations, contamination, etc...)

Classification of bases according to percentage correction

1. Flat   - 10-15%
2. Base-on-base - 16-29%
3. New Base - 30% or more

Classification of bases according to timeline

1. Bottoming base
• Base at the bottom of a bear market
• Best buy points come on breakouts off  bottoming bases
2. Stage Base

• Each base after a bottoming base or a new base or after a 20% run-up from the prior base (investor’s corner)
• Stage bases are numbered sequentially
• Base counter is reset to 1 after any of the following:

• Bottoming base
• A new base
• Bottom of base is lower than previous base

• Subsequent stage bases are numbered sequentially from 2 on
• Late stage base
• Is a 3^rd stage base or higher
• Are risky

3. Base-on-base
• A base after a run-up of less than 20% from the prior base
4. Base on top of a base
• Is the last base of a bear market prior to the bottoming base

Classification of bases according to chart patterns

1. Cup (with/without handle)
2. Saucer (with/without handle)
3. Multiple-bottom (with/without handle)
1. Double-bottom
2. Triple-bottom
4. Flat
5. Ascending
6. Flag

Base Duration

• A flat base requires at least 5 weeks of duration
• All other bases require at least 7 weeks of duration

Cup Pattern

• Occurrence
• Most common and reliable after a bear market
• Very common during general market declines
• Duration:
• Last 7-65 weeks(2 to 15 months)
• Most last 12-27 weeks(3-6 months)
• Shape
• Best if in a U-shape, as opposed to a V-shape
• Shakes out  weak holders
• Build a more solid foundation of strong holders who are less apt to sell during next advance
• Symetrical – similar number of weeks on left and right side
• Prior to correction, stock run up 30%+
• Important Points:
• A=Absolute peak (start of the cup on the left leg)
• B=absolute bottom
• C=top of the right leg (highest intraday price on the day price reaches the top)
• D=Bottom of the handle
• Left Side (correction from the absolute peak):
• Top of leg=point A
• Might correct 1.5 to 2.5 times the market average
• Corrects 25-40%
• Bottom
• Volume dries up noticeably near the low for 2+ weeks( shakeout)
• Bullish sign if price tightens up
• Absolute bottom=point B
• Right Side
• Volume
• Usually spikes
• Stays above average
• Handle
• Last dose of selling pressure; prepares for breakout
• Downward price drift (shakeout of weak holders)
• Top of right leg before price drift=point C
• C <= A and C > A – 15%
• 2+ weeks
• Volume dries up noticeably near the low
• Prices:
• Correct:
• 10-15% in a normal market
• 20-30% in a bear market bottom
• Stay in the upper half of the overall cup
• Stay above 200-day MA
• Tighten up at least some days or weeks
• Bottom of the handle=point D
• No more selling
• Pivot price = Point C
• Breakout (can be used as screen rules):
• Rally from the bottom of the handle
• Surges through the pivot line
• Makes new price high
• Volume increases at least 50%
• Tends to move up 20%+
• Buy Point
• Point on the handle where it breaks through the pivot line + 0.10
• Price no more than 5% over pivot point
• Can buy at the point, inside the handle and prior to the breakout, where the stock breaks the upper channel line, but it is risky.
• Can buy at the point, inside the handle and prior to the breakout, where chart shows 3 tight weeks, but it is risky.
• Cup without handle
• Can succeed but failure rate is higher

• Bullish Signs:
• Cup is U-shape as opposed to V-shape
• # of up weeks on above average volume > # of down weeks on above average volume
• The handle forms within 5-15% of the top of the left leg
• Volume decreases on the left side of the cup or left side of the handle, forming a downward slope
• Volume increases on the right side of the cup or left side of the handle, forming an upward slope
• Breaks the 200-day MA on the way down (left side) and on the way up (right side)
• There is a shakeout at the bottom of the cup or handle (price decrease with high volume)
• Price tightens up close to the bottom of cup
• Volume subsidies close to the bottom of the cup
• There is evidence of support at the bottom of the cup or the handle:
• Churning day or week. Churning happens when price does not decrease much although volume is above average
• Price closes in the top half of the bar
• Volume on the breakout week is higher than the week before
• Price does not change much for 3 weeks or more (3-week tight pattern)
• Price tightens up (for some days or weeks) just before the top (point C)
• Up weeks on above average volume followed by weeks of very low volume

Saucer Pattern

• Similar to cup but tends to stretch out over a long period of time
• Pattern more shallow
• Symetrical – similar number of weeks on left and right side

Double-Bottom Pattern

• Similar to cup but looks like a “W”
• Not as common as cup-with-handle
• Handles are not as essential because shakeout happens in the second bottom area
• Symetrical – similar number of weeks on left and right side
• A = top left leg
• B = first bottom
• C = top of middle of W
• D = second bottom
• C should be less than A and greater than (A-B)/2 (top half of the left leg)
• Bullish if D < B
• D should be no more than 2% below B
• Pivot point
• If it has a handle then it is the peak price of the handle, otherwise it is the top of the middle of the W.
• Buy Point
• Point where it breaks the pivot line + 0.10
• Breakout needs to have high volume
• Shakeout + 3
• Alternative buy point to the traditional pivot point
• Buy point is B+$3 (for $20-$30 stocks, or percentage for others)
• Requires D  <  B
• Requires high volume on the breakout

Triple-Bottom Pattern

• Similar to double bottom
• Weaker and less attractive than double bottom because falls back sharply to new lows 3 times

Flat-Base Pattern

• Second-stage base after a stock has advanced 20%+ of  a cup, saucer or double-bottom
• Correction
• Price drifts down in a fairly tight range
• At least 5-6 weeks
• 10-15%
• Second opportunity to buy
• Pivot point is the highest point at the beginning of the base before the correction
• Buy point is the point where it breaks the pivot line

Flag Pattern

• Rare
• Similar to a flat-base
• Stock advances 100%+ in 4-8 weeks
• Correction:
• Price drifts down in a fairly tight range
• 4-5 weeks
• 10-20%
• Pivot point is the highest point at the beginning of the base before the correction
• Buy point is the point where it breaks the pivot line

Ascending Bases Pattern

• Series of flat bases on top of each other
• Repeats the following cycle several times:
• Consolidates 10-20% usually due to general market declining
• Rallies
• Breaks out and continues uptrend
• Each bottom is higher than the previous one
• Most reliable duration: 7+ weeks
• Buy point: breakout after the third cycle

Breakout Behavior (investors.com)

• Regardless of pattern, breakout shoud be on high volume
• Sometimes a stock needs multiple breakouts. If price declines below the pivot point after the breakout but the sell rules are not triggered then it might still breakout again
• In the crucial days after a breakout:
• Volume should be above average sometimes
• Price should hold above pivot point

Base on Top of a Base

• Happens at the latter stages of a bear market
• Breaks out of base and advances but it is unable to continue advance because general market begins another leg down
• Pulls back and builds a second back-and-forth consolidation area on top of  its previous base
• At the end of bear market can spring up powerfully
• Signals a possible leadership stock in the next bull market
• Provides no buying opportunity

RPS Line

• Trend should follow price line
• RPS at breakout should be similar to RPS at point A (beginning of base)

Error Prone Patterns

• Wild duration
• Take too long to form (too wide)
• Wild swings
• Too deep
• Correct > 2.5 times the average
• Correct 40-50% in a bull market -> much more difficult to make new highs
• Price range too wide
• Come straight off the bottom to make new highs
• Shape
• Assymetric
• V-shape
• Corrects more than 35%
• Late stage bases
• Low volume on the right leg up
• Handle
• Too wide
• Too deep
• In the lower half of left leg
• Below 200-day MA
• Price range too wide
• Drifts upward -> no shakeout (high risk)
• Price does not tighten up
• Breakout
• With low volume
• Price drops below pivot point

When to Sell and Cut Losses

Nature of Investing

• Investment is buying and selling
• Can’t win the game of investing without a good defense (sell rules)
• To be a successful investor:
• You don’t need to be right all the time
• When right -> win a lot
• When wrong -> lose a little
• How to know when a stock buy is wrong:
• Price of stock drops below what you paid
• The farthest it goes down, the higher the probability it was a wrong buy
• Investing in stocks should be like running a clothes store. If a merchandise does not sell you reduce its price, put in on sale and with the proceeds buy more of the hot merchandise. You take a loss on the reduced sales price but makes up on the increased revenues from the additional sales of the hot merchandise.
• Typical investor:
• Suffers from price-paid bias.
• Does not want to sell until recovers losses. The problem is that the Market does not care about the price an investor paid for a stock.
• Is a big gambler:
• Makes a bet
• Stay with it
• If things go wrong, lose a lot
• Strategy to become successful:
• Develop precise buy and sell rules
• Be disciplined
• Control emotions
• Don’t become emotionally attached to a stock
• Don’t let losses scare you, learn with them
• Don’t be greedy, sell soon
• Don’t fight or argue with the market
• Forget ego and pride
• Investor motto:
• All stocks are bad … Unless their price go up

Nature of Selling

• Individual investors have the advantage of being able to move out of a stock quickly
• Only realizes profit when sell
• Selling reality:
• Will never be able to sell at the exact top
• Don’t be upset because sold and stock still went up in price

Selling to Cut Losses

• A good stock bought at the wrong time can go down in price as much as a bad stock
• A stock going down in price:
• Is not a good investment.
• Better to sell and put the money in a better stock
• Every 50% loss starts with 10%
• To recover from a 50% loss the stock needs to gain 100%
• Cutting losses reduces risk, it is like buying an insurance policy. If you didn’t have an accident with your car, was the car insurance money wasted? Same applies to stocks.
• Frequently, the stock sold turns right around and go back up. That’s frustrating but does not mean you were wrong.

When to Sell and Make a Profit 

Reasons for a stock to top and revert down

• General market tops
• Sector falls out of favor
• Company conditions change
• Institutional money pushes stock up to unsustained levels
• Stock appreciates so much that it attracts lots of buyers. When everybody that could buy have already bought, the only direction possible is down.

Sequence of events at the end of an up run

1. Stock advances for many months
2. For one or two weeks, advances even faster
3. Looses steam and tops
4. First pull back from the top
5. Rallies but fails to recover to the top
6. Several pull backs and fake rallies to shakeout buyers

Signs of a Climax Top (also called blow-off top)

• Four out of five leaders end in a climax top
• Price advances 25%+  in 1-3 weeks on rising volume (specially after a stock split)
• Price is 70% or more above moving average
• Breaks the upper channel line (line connecting 3 high points over a long period)
• Exhaustion gap: opens on a gap up in price from the previous close and stays up
• Heaviest daily volume since broke out of a first base
• Widest weekly price spread since breakout
• Largest price increase in a day since beginning of run up
• Price goes higher but volume trends lower, suggesting that  big investors lost interest
• Close at or near the lowest price for the day
• Railroad tracks (as seen on a weekly chart)
• Price does not advance, but retraces the prior week’s large price spread
• Sign of heavy distribution
• Heavy volume fails to move price up much
• The week’s high is the highest high in 52 weeks and today’s close is lower than the close last Friday

Signs of First Decline from the Top

• Number of consecutive down days > number of consecutive up days
• Breaks 50-day MA
• 200-day MA flattens

Signs of First Poor Rally

• Fails to recover to the top
• Volume is lower than during previous decline
• Stays under the 50-day MA

Signs of significant decline

• Breaks the lower channel line on the way down
• Lower channel line -> connect all low points for several months
• Head-and-shoulder pattern
• Very reliable
• Left shoulder, head, right shoulder
• Right shoulder must be slightly below the left shoulder
• Sometimes happen just after a breakout of a cup or saucer pattern. In this case the cup/saucer base is the left shoulder and the top of the breakout is the head.

Guidelines to Hold a Stock

• Number of consecutive up days >> number of consecutive down days
• Price stays in the middle of the channel lines
• Declines bounce back on the 50-day MA
• Hold for at least 8 weeks if price increases 20%+ in only 1-3 weeks from pivot

Guidelines to Add Shares

• Add if stock develops a short stroke pattern as detailed below:
• After a strong run-up from its breakpoint stock trades in a tight range for at least a week meaning that institutional investors are reluctant to sell.
• Easier to identify on a weekly chart; looks like a small stroke of a pen
• Buy when stock thrusts higher on higher volume
• Keep new position small so that the average cost remains at least 20% below the current price

How to Identify Market Direction 

Indicators

• Price level
• 50-day and 200-day price Moving average
• Strong indicator of a change in market direction when 200-day MA is penetrated
• Volume
• Moving average
• Do not consider the 3^rd Friday of each month because it is when options on index, futures and stocks all expire, which drives up volume artificially.
• Ratio of Advances vs Declines
• Ratio of Advance volume vs decline volume
• IBD Mutual fund index
• Tracks performance of top 20 funds
• Reflects performance of hundreds of the best stocks
• Action of leading stocks (IBD 100)

Definitions

Churning Day

• Price changes just a little with volume higher than the previous day (or volume above average).

Accumulation Day

• Higher close on volume higher than the previous day (or volume above average)

Distribution Day

• Lower close on volume higher than the previous day (or volume above average)

Light accumulation Day

• Up slightly
• Advances on volume below the previous day
• Small spread
• Closes in the middle of the daily range
• Advancing volume not much higher than declining volume
• Advancing issues not much higher than declining issues

Heavy accumulation day

• Rises on volume above the previous day and preferably above average
• Large spread
• Closes higher than open
• Closes in the top part of the daily range
• More advancing volume than declining volume
• More advancing issues than declining issues

Light distribution Day

• Index down slightly
• Declines on volume below the previous day
• Small spread
• Closes in the middle of the daily range
• Declining volume not much higher than advancing volume
• Declining issues not much higher than advancing issues

Heavy Distribution Day

• Declines on volume above the previous day and preferably above average
• Large spread
• Close lower than open
• Close in the bottom  part of the daily range
• More declining volume than advancing volume
• More declining issues than advancing issues

Uptrend Market

• Lots of heavy accumulation days
• One or two heavy accumulation days are followed by a couple of light distribution days
• Growth industries (medical, retail, technology) lead market
• Defensive industries (utilities, oil&gas, metals) do poorly
• Rallies on any good news
• Recovers quickly from any bad news
• A lot of times opens low but closes high (improves during the day)

Downtrend Market

• Lots of heavy distribution days
• One or two heavy distribution days are followed by a couple of light accumulation days
• Churning day
• Growth industries (medical, retail, technology) are taking a beating
• Defensive industries (utilities, oil&gas, metals) are up
• Declines significantly on bad news
• Does not rally much, if at all, on good news
• A lot of times opens high but closes low (deteriorates during the day)

How to Determine a Market Bottom

• 100-day MA points down
• Downtrend loses steam (sellers shakeout):
• Goes down on volume lower than the day before
• Churning day(s)
• Downtrend Reverses
• First day of accumulation: closes higher on volume higher than the day before (or volume above average)
• Follow-through on the 4-10^th day: market rallies > 1% on volume higher than the day before and possibly higher than average
• Uptrend
• MA starts to flatten
• Declines, if any, are gentle and barely break the MA
• MA line is totally horizontal, no inclination at all.
• Breaks the 100-day MA on the way up
• MA starts pointing up

How to Determine a Market Top

• Uptrend loses steam (buyers shakeout)
• Goes up but volume is lower than the day before
• Churning day(s)
• Uptrend reverses:
• 2-3 distributions in 5 days or 5 distributions (or churnings) in 2-4 weeks(10-20 days)

Summarized sequence of technical events on the NASDAQ (1999-2003)

• Bull market picks up steam
• Bull market loses steam and reaches top
• Bull to bear transition:
• 2 or 3 declines and rallies that fail to move back to the top and barely break the 100-day MA
• Bear market:
• Several declines (3 in the 2000-2001); rallies fail to break the 100-day MA
• Several more declines/rallies but not as sharp as before (bear losing steam). May break 100-day MA.
• Reaches absolute bottom
• Bear to bull transition:
• 1^st rally from absolute bottom breaks 100-day MA
• 1^ST decline is gentle and does not break the 100-day MA much. Bottom is higher than the previous bottom.
• Bull starts with an advance that is not as sharp as the previous ones.

Detailed sequence of technical events on the NASDAQ (1999-2003)

• Bull market picks up steam:
• Price increases speed up
• Volume increases
• Runs away from the 100-day MA
• MA line becomes steeper
• Liquidation on 3 to 5 days over 1-3 weeks while the market still advances (smartest people selling at the top).
• Bull starts to lose steam and reaches top:
• At the absolute top, the weekly volume is the largest of the bull market
• In the following weeks:
• Price does not advance much (stalling action)
• Spread becomes wider
• Daily volume
• Might stays high or might subside
• Not as high as the absolute top
• Bull to bear transition (buyers shakeout):
• 1st decline:
• Sell off for 4 days is sharp and breaks the 100-day MA
• Volume stays high
• 1^st rally
• Barely breaks MA
• Recover less than half from the absolute top
• Volume is lower than during the decline
• 1 or 2 more declines followed by rallies that:
• Are as sharp as the first one but not as long
• Fail to move much further up than the 100-day MA
• MA line flattens
• Bear starts:
• 1^st bear decline:
• MA line starts to turn down
• Goes down further than all previous declines since the market top
• Volume is higher than all previous declines (desperate people selling on the way down)
• 1^st bear rally:
• Fail to break 100-day MA
• Volume is as strong as in the previous decline
• Bear continues strong:
• 100-day MA points down
• Volume on the way down picks up and at a certain point is higher than the volume at the absolute top
• Several more declines/rallies (2000/11,2001/2) that:
• Have bottoms lower than the previous one
• Fail to break the 100-day MA
• Rallies tend to get further from the MA and then the trend reverses
• Bear loses steam:
• Previous rally was the closest to the MA
• MA starts to flatten
• Next decline and rally are not as sharp as previous ones (2001/5)
• Rally breaks 100-day MA (bull within bear)
• MA line almost flat
• Several more declines/rallies that:
• Bottoms are lower than the one before
• If break the MA on the way up, does not advance much further
• MA line turns down
• Bear to bull transition (sellers shakeout):
• Reaches absolute bottom
• Rally breaks the MA
• MA starts to flatten
• Decline is very gentle and barely breaks the MA
• MA line is totally horizontal, no inclination at all.
• Bull starts:
• Rally is gentle
• MA starts to point up