IBD Meetup: Recommended Reading

To understand the CAN SLIM Investment System, you need to carefully read
William O’Neil’s book How to Make Money in Stocks, probably more than once.
Take notes and use the book as a future reference. Additionally, for those who
would like to delve deeper into the world of stocks and further sharpen their
investing skills, below is William O’Neil’s recommended reading list:

William J. O'Neil's recommended reading list:

24 Essential Lessons For Investment Success - William J. O'Neil

How To Make Money In Stocks - William J. O'Neil

The Battle For Investment Survival - G.M. Loeb

Tape Reading And Market Tactics - H. Neill

How To Trade In Stocks - J. Livermore

Reminiscences Of A Stock Operator - E. Lefevre

How I Made Two Million Dollars In The Stock Market - N. Darvas

My Own Story - Bernard Baruch

One Up On Wall Street - Peter Lynch

How To Buy Stocks - Louis Engel

Tracking the Daily Market Averages
Your Most Important and Profitable Investing Skill

Tracking the market’s direction is a powerful key to successful investing. If you trade in sync with the market, take
advantage of new uptrends, and learn to reduce investments at the beginning of new downtrends, you can make, and
keep, a lot of money. If you don’t acquire these skills, you’ll be fighting the market and find it much more difficult to buy
big winners and retain most of your profits.

There are many market and economic indicators out there, but nothing is more valuable than what the market is actually
doing. What difference does it make what the bull/bear ratio is if the market is telling you what is going on? These other
indicators can be dangerous, because you may choose the metrics that support your view of the market. But, your
opinion doesn’t determine market direction. The market is telling you what it’s doing, why not listen?

Daily Tracking of the Market

You need to track the market’s activity every day. Whether the market is in a roaring bull or extended bear, you need to
know what the market is doing day-to-day, to ensure you are making the correct decisions regarding your hard earned
money. To help you with this, you should be looking at the general market charts on B2 (see chart on next page) of
Investor’s Business Daily and eIBD™. These oversized charts for the Nasdaq, S&P 500 and NYSE, make it easier to spot
®

price and volume clues, and the critical distribution days, rally attempts, and follow-though days.

1
©2011 Investor’s Business Daily, Inc.

2
Learning to read these charts with knowledge and skill will help you protect your cash before a big market downturn
and start buying the big winners right away in a new confirmed uptrend. By using these charts, you’ll begin to recog-
nize where the market is, and what it is actually doing. We’ll discuss the benefits of doing this in three parts:
Part 1 — Market Tops and Distribution Days
(recognizing six distribution days over a five week period at the top of the market)
Part 2 — Rally Attempts
(how to interpret each attempted rally)
Part 3 — Follow-Through Days
(recognizing follow-through days - time to begin buying)

Part 1: Market Tops and Distribution Days

Most people don’t recognize market tops because they don’t know exactly what to look for. Some do know the clues of
a market top, but ignore them since most distribution days occur while the market is still going up. Everyone is happy.
Their stocks are going up. So, they do not pay attention and count the number of tell-tale distribution days. You must
recognize these distributions days and how they will help you sell and raise some cash as the market tops, lock-in your
gains, and reduce your risk exposure.

Distribution Days
Distribution in the market takes two forms:
Distribution Day – This occurs when one of the major indexes (Nasdaq, S&P 500, NYSE), closes more than 0.2% lower
on higher volume than the day before. It doesn’t matter how much higher the volume is, as long as it is higher. It’s that
simple to spot and count the number of days. You can do it!
Stalling Day – This occurs when one of the indexes listed above shows a volume increase from the day before, but the
index itself shows a significantly smaller price increase compared to the larger price increase on either of the two days
before, and/or barely finishes up for the day.

3
Market Topping
Example
4
Now, let’s look at
1
the market top from 5
6
Spring 2011 as an 2

example of topping 3
action. View chart to
the right and the
descriptions of
distribution days on
the next page.

©2011 Investor’s Business Daily, Inc.

4
Distribution Day #1 - The market is moving along, and all of a sudden, you get a distribution day. The first day doesn’t
mean a whole lot. They occur naturally in a strong market.

Distribution Day #2 - A few days later, you may get a second. And, that doesn’t mean much either.

Distribution Day #3 - However, when a third distribution day occurs, that’s when you really must start paying attention.
Now, you have to begin thinking, could this lead to 5 or 6 distribution days which almost always marks the top of a market?

The top could last 5 to 7 weeks, 6 months or longer. But, the probability for a decline that will affect most stocks is very high.

Distribution Day #4 - When you get a fourth distribution day, you may now want to consider selling shares or begin to
lighten up some positions. You don’t want to argue with what the market is beginning to tell you.

Distribution Day #5 - On the fifth distribution day, you should consider selling more of your holdings, since now we are
nearing the sixth distribution day, which typically confirms this is topping action.
At this time, the market is still going up and people are happy as a lark, since things appear to be working and the news
is probably pretty good. They have certain opinions, and they really like this stock or that stock. So, most people simply
don’t want to think about selling. It’s all about human psychology.

Distribution Day #6 - Then, you get the sixth distribution day which tells you definitively that the market is now being
overcome by supply about ready to correct. At this point you should be off margin, if you use it, and have safely raised
more cash.

This is when you want to start building your watch lists with leading stocks that hold up relatively better during the
correction and leading stocks that correct and begin forming new bases. Virtually all sound bases are created during
market corrections. So, this is no time to go to sleep on the job. You’re now watching the market every day, looking
for a rally attempt that, in time, leads to a follow-through day. That is your crucial signal to begin buying fundamentally
strong stocks that start coming out of proper bases.

5
Part 2: Evaluating Each Rally Attempt
When the market is in a correction, it doesn’t go straight down. There will be up days here and there, and there will also
be several up days strung together. These signify an attempted rally. There are several signs to look for in a rally attempt
to determine:
a) if it’s for real and may lead to a strong follow-through day starting a new uptrend
or
b) if it is just the standard ups and downs of a market continuing to sink lower.

If you learn to differentiate between these and spot key clues, it can be very profitable. There are several factors you
want to measure carefully when the market begins each new rally attempt.

Volume: Is it increasing or decreasing?

On the way up, is volume increasing each day as the market goes higher in price?

Volume
increasing on
up days

©2011 Investor’s Business Daily, Inc.

If so, you may have something. But, you still need to wait for confirmation of a new uptrend with a strong follow-through
day.

6
or
Is volume declining each day on the way up?

Volume
decreasing on
up days

©2011 Investor’s Business Daily, Inc.

This indicates no real demand for shares as the market rises. This is not a good indicator for a rally attempt, since the
price rise increasingly lacks conviction, it can be short-lived before a new leg down.

Volume: Is it above average or below average?

Is volume on the way up above average or below average?

Above average
down days,
below average
up days

©2011 Investor’s Business Daily, Inc.

For example, as the market is drifting lower, are your seeing above average volume on several down days in a row, then
when it turns up for a few days the volume is below average? That’s telling you there’s more supply than demand, which
usually indicates the days up may be temporary and the general trend is still down.

7
Volume: Is it higher on the way up or on the way down?
Is volume on the way up higher than it was on the way down?

Above average
up days,
preceded by
even higher
down days
©2011 Investor’s Business Daily, Inc.

For example, you may have a few up days on above average volume, but if the previous four or five down days were on
even higher volume, that indicates the rally may soon fail.

Does the Market Have a Personality?

When the market is drifting lower, it can start developing a personality. There may be a leg down on heavy volume, then
a three day rally attempt in lower volume. Then, another leg down in heavy volume and another three day rally attempt
on lower volume.

Weak rally
personality

©2011 Investor’s Business Daily, Inc.

When you learn to recognize this, you can better stay in sync with the market.

8
Plus, if you’re shorting, this may be a great clue. If the market is rallying up on light and/or decreasing volume for a few
days, then the first day it turns lower on heavy, increasing volume, that’s where you may (before new lows are made)
want to short.

Eventually, the market will have the strength to start a real move higher, so the attempted rally will be successful and
confirmed by a strong follow-through day on the fourth attempted rally day or even several days beyond the fourth day.

Part 3: Follow-Through Days

Successful investors understand the different stages of a normal stock market cycle and pay special attention to the
importance of market corrections. Market downtrends can help you find new leaders since most chart patterns are
created during market declines. It’s easy to give up and throw in the towel during a weak market, but investors must
remember that the market will turn on some out-of-the-blue news, and a whole new uptrend may start with a strong,
valid follow-through day. It’s important to note: new winners will emerge right on a follow-through day, so you need to be
prepared, on the job and mentally ready to take advantage of a sudden developing new uptrend.

Follow-Through Definition
Follow-through days mark the start of all new market uptrends. After a period of market weakness, the market will mark
a bottom, that’s the start of a rally attempt when a major index (Nasdaq, S&P 500, NYSE) will close higher in price.

Then, the first two or three days of the rally are disregarded, as it has not yet proven it will succeed and follow-through
with power and conviction to confirm this rally is a real new uptrend in the market.

Therefore, the follow-through day needs to come on or after the fourth day of a rally attempt. A follow-through day occurs
when one of the major indexes listed above closes up usually around 1.5% to 2% or more for the day on increased
volume vs. the day before. This indicates that the market, in the majority of cases, has changed direction and is probably
beginning a new uptrend.

9
Follow-Through Days Occur When You Least Expect Them (Again, it’s all about human psychology.)
When the follow-through does occur, it comes when you’re probably not feeling great about the market, the market has
been declining for weeks or months, maybe you lost a little money at the end of the last rally, and the news is almost
all negative. The “experts” will be saying the economy is poor and the market is terrible. Most people listen to the news
and not the market. It defies human nature to buck the trend or resist popular opinion, but you must watch and care-
fully track the day-to-day market averages and when the follow-through occurs, you need to take some action.

The Big Winners Can Come Out Fast

The big stock leaders that go up 100% to 200% or more can break out ON the follow-through day or immediately after.
This is why you never want to give up on the stock market or cancel your subscription to save a few dollars and end up
missing out on $10,000, $50,000, $100,000, or more. You always want to be there ready to act. If you buy at the right
time, you can enjoy the entire run, plus, you’ll be in a position to better execute proper add-on purchases to increase
your potential profits even more. If you wait, you could be chasing a stock and get shaken-out during a normal pullback.

You may say: “what if the follow-through fails?” Well, then the CAN SLIM® Investing System’s many sell rules will help
you get out quickly. Then, you get ready for the next follow-through. Remember, a new bull market has never started
without a follow-through day. And, every time there is a successful follow-through, the big new leaders break out quickly,
typically on the first day or during the first 10 to 15 days. This fact has been proven through 27 different stock market
cycles over decades.

This is something you want to learn how to always spot and never miss in the future. Why? Because, there will be many
strong follow-through days and hundreds of dramatic new leaders in every future uptrend. America’s innovators and
inventors lead each new market cycle due to our unlimited freedom and opportunity for virtually everyone. That’s why
so many people the world over continually come here. So, learn how to recognize and capitalize on our never-ending
parade of new innovators.

Examples from the September 1, 2010 Follow-Through

Many leading stocks broke out on, or right after the 9/1/2010 follow-through day. Here are examples of just three of
them:

10
Chart A: Nasdaq Composite (0NDQC)
Index
Scale
This daily chart S&P 500

shows the 9/1/10

follow-through day 2815
2800
and three winning 2766

stocks that took off

right away (CMG, 2705 2706
2676
SINA, and LULU), with LULU
their percent price +142% 2592
2603
2600

increases achieved in SINA

the months after the 4th day follow-through +227%
(+3.0% on Nasdaq)
breakout. CMG
2459

+86% 2400

2341
2309

2200

2139

2099

2061

2000

3.3B
2.4B 2.4B 2.4B 2.3B 2.4B 2.6B Volume (00)
2.2B

14,000,000

8,000,000

4,000,000

2,000,000

14 28 11 25 9 23 6 20 3 17 1 15 29 12 26 10 24 7 21 4 18 4 18 1 15 29
June July August September October November December January February March April
©2011 Investor’s Business Daily, Inc. 4/29/2011

11
Chart B: Chipotle Mexican Grill CMG NYSE Retail-restaurants
Price
This weekly chart for Scale

700
Chipotle Mexican
600
Grill shows you the
500
follow-though, CMG’s S&P 500 450

breakout and the 400

360
ensuing run. 320
300
280
Follow-through 262.77
260
240
220
Breakout 200
180

155.49 155.42 160

150
140
130
127.30
120
110
98.66 100
92.39
90
90.09
80
77.51 79.02
67.92 70
62.36
60

52.16 50
45

40

36.86 36

32
30
28
26
24
22
20
18

Volume
8.9M 8.6M 8.4M
7.7M 7.8M 8.0M
8,000,000
6.4M
5.5M 5.7M
5,000,000

3,000,000

1,800,000

Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11

IPO: 1/26/2006 ©2011 Investor’s Business Daily, Inc. 4/29/2011

12
Chart C: Sina Corporation SINA NASDAQ Internet-content
Price

This weekly chart for Scale

Sina shows you the 320

300
follow-though, SINA’s 280
260

breakout and the S&P 500

240
220

ensuing run. 200

180

160
150
140
130
120
110
100
90

80
Breakout
70

59.27 58.60 Follow-through 60

47.95 50
45

37.73 40
36
34.65 35.26
32
31.53 32.00 32.00
30
28
26
24
22
20
18
17.89
16
15
14
13
12
11
10
9

Volume
22.6M
17.7M
15.6M 14.9M
13.0M
10.9M 10.9M 10.4M 12,000,000
8.1M
7,000,000

4,000,000

2,000,000

Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11

IPO: 4/13/2000 ©2011 Investor’s Business Daily, Inc. 4/29/2011

13
 Lululemon Athletica LULU NASDAQ Retail-apparel/shoes/acc
Chart D: Price

This weekly chart for Scale

140
Lululemon shows you S&P 500
130
120
the follow-though, 110

LULU’s breakout and 100

90

the ensuing run. 80

70

60.70
Breakout 60

Final Note: 50
46.49
45
It’s important to note, 40
37.33
that, as of this writing, 36

LULU and CMG are 31.08

32
30
28
still making new highs. 26
Follow-through 24
22
21.25
20

New Issue $18.0 18

15.64 16
15
14
13
12
11
10
9

5
4.5
4.33
3.8
22.2M
15.4M 15.5M Volume

10.3M 10.7M 10.4M 10.5M

7.9M
8,000,000

5,000,000

3,000,000

1,800,000

Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11

IPO: 7/30/2007 ©2011 Investor’s Business Daily, Inc. 4/29/2011

©2011 Investor’s Business Daily, Inc. Investor’s Business Daily, IBD, CAN SLIM and corresponding logos are owned by Investor’s Business Daily Inc.
14
 The Basics: Daily Charts

Blue Bar = Up Day Horizontal line =

closing price
Pink Bar = Down Day Day’s price
range

50-Day Moving
Average Line
Price

200-Day Moving
Average Line

Relative Strength Line:

Compares stock’s
Horizontal line shows avg. performance vs. S&P 500
volume over last 50 days
Volume
(# of
shares
traded)

5
© 2010 Investor’s Business Daily. All rights reserved.
 The Basics: Weekly Charts

Horizontal line =
Blue Bar = Up Week
closing price for week Week’s price
Pink Bar = Down Week range

10-Week Moving
Average Line

40-Week Moving
Average Line
Price
Relative Strength (RS)
Line: Compares stock’s
price performance to that
of S&P 500 over last 52
weeks

Horizontal line shows weekly avg.

volume over last 10 weeks
Volume
(# of
shares
traded)

6
© 2010 Investor’s Business Daily. All rights reserved.
 What to Look for in a Chart Daily Chart

Unusual Volume
Institutional investors (banks, mutual funds, etc.)
Would you see these key
are main drivers of stock prices. signs without a chart?
Charts show you what big investors are doing by
tracking price & volume on daily or weekly basis.

Unusually heavy volume on UP days Unusually heavy volume on DOWN days

= buying among big investors. = selling among big investors. Watch out!

Line indicates avg. volume

7
© 2010 Investor’s Business Daily. All rights reserved.
What to Look for in a Chart
Support from Big Investors Weekly Chart

Big investors make or break stocks. Charts show you if

they’re buying – or selling – a stock at key times, such as:
- Pullback to 50-day (or 10-week) moving average line
- Breakout from chart pattern

Support

Support Sell-off: Big investors sell

on heavy volume, pushing
Support stock below 50-day line.

Support: Stock quickly goes back

above 50-day line. Means big
investors are buying shares.

10-week moving avg. line Charts are

Breakout from base easiest way to
see support or sell-off.

8
© 2010 Investor’s Business Daily. All rights reserved.
8
 What to Look for in a Chart
Uptrend, Downtrend, Ignore opinions & predictions.
or Sideways Trading?
Check the chart!
Buy when a stock is moving up, not down.

One glance at chart shows you stock’s direction.

Uptrend Downtrend Sideways (or Flat) Trading

Stock headed in right direction. Still Avoid. Wait for stock to form proper Direction unclear. Is it forming a
need to wait for proper buy point. base & rebound before buying. sound base?

9
© 2010 Investor’s Business Daily. All rights reserved.
 What to Look for in a Chart
Chart Patterns Keep It Simple!
Before making big runs, the best stocks tend to form patterns.
Learn to recognize them! Patterns help you: Get Started with 3 Patterns…
Reduce your risk
Pinpoint the right time to buy
Weekly Chart

See the Best Time to Buy

Buy Point

Cup-with-Handle

What’s a “Buy Point”?

- Point from which a stock is most likely to go UP in price
- Every chart pattern has a specific buy point
- Based on detailed study of all big winners since 1880s

10
© 2010 Investor’s Business Daily. All rights reserved.
Cup-with-Handle
Most Common and Profitable Pattern
Stocks that go up 50%, 100% or more often form cup-with-handle at start of big run.

Reaping big gains starts with recognizing this pattern.

• Resembles teacup viewed from side

• Many occur in every new bull market

12
© 2010 Investor’s Business Daily. All rights reserved.
Cup-with-Handle: Checklist

 Handle: Depth 12% – 15% (up to 33% range in

bear markets). Volume should get lighter, not
heavier.

 Prior uptrend: ≥ 30%

Buy point should be within
15% of prior 52-week high.

 10 cents. Volume at buy

Buy point: Handle peak +

point should be 50% higher

than average daily volume.

Handle should form in

upper half of base.
 Base length: ≥ 7 weeks (Could be much longer)

Why Add
Bear Market
10 Cents
Corrections
to Buy Point?
 Base depth: 20% – 30% (more
severe in bear markets)
For each
Buy pointchart
is area
its strength
often
pattern,
of priordeclines
deeperbyinwaiting
resistance.
bear markets
for a rise
in bases
than
10 in
Makeand
cents
thehandles
bull above
stock prove
markets.
are
that point
of resistance
Weakness in before
overall you
market
buy.pulls individual stocks down.

13
© 2010 Investor’s Business Daily. All rights reserved.
 Cup-with-Handle: What’s Happening?

Handle: Late buyers with losses sell

now that they’re near break-even. Big
investors sit tight.
Prior Uptrend: Near peak, story too
obvious. Not enough new buyers left to
push stock higher.

Buy Point: Big investors push

stock through prior point of
resistance in big volume. Shows
enthusiasm for higher stock price.
May be new market uptrend.

Right-side of Cup: Big investors slowly

Sell-Off: Big investors take profits.
Overall market may be weak. Late
buyers now frustrated by losses.
accumulate shares. Late buyers with losses
dream of getting back to break-even.
Overall market may be strengthening.
Bottom: Big investors done selling;
start buying shares.

14
© 2010 Investor’s Business Daily. All rights reserved.
Apple (AAPL) 2004 Cup-with-Handle WEEKLY CHART
Story Behind the Stock
- Hot new product: iPod Buy Point: peak of
- Triple-Digit Earnings: +433% & +300% in 2 quarters BEFORE breakout handle + 10 cents
- Accelerating Sales: +8%,Prior Uptrend
+19%, PeakBEFORE
+36% in 3 quarters of handlebreakout

Big volume at
breakout

Take closer look with DAILY chart 

15
© 2010 Investor’s Business Daily. All rights reserved.
15
 Apple (AAPL) 2004 Cup-with-Handle DAILY CHART

Buy Point: peak of

Peak of handle
handle + 10 cents

Breakout:
On volume
over 50%
above avg.

Handle: Forms in
Base depth = 23% upper half of base.
 Safely within 20% – 30% range Volume lighter.

16
© 2010 Investor’s Business Daily. All rights reserved.
© 2010 Investor’s Business Daily. All rights reserved. 16
Apple (AAPL) Run After March 2004 Cup-with-Handle WEEKLY CHART
 1,534% gain in 99 weeks

Buy Point
2004 Cup-with-Handle
(as shown in prior slide)

Notice how weekly chart gives longer term

perspective than daily chart.

17
© 2010 Investor’s Business Daily. All rights reserved.
© 2010 Investor’s Business Daily. All rights reserved. 17
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