While there is certainly a right time and wrong time to buy stocks, there is never a wrong time to learn how to invest.
You're likely familiar with the adage "buy low, sell high." IBD's research has shown this to be completely wrong. Our methodology is not about trying to buy at the lowest possible price but rather to buy when your chances of success are greatest.
To that end, stock chart analysis is a critical skill. Learning to recognize the classic base patterns is the best way to improve your chances of success.
How To Invest: Charts Illustrate Supply And Demand
Base patterns are supply and demand in motion, or in illustrated form. The formation of any pattern begins when existing shareholders are selling. Whether taking profits or losses, this selling is called distribution and increases the supply of available shares.
This creates either stalling action in an advancing stock, or an actual downturn into a price consolidation that could last weeks or months.
Eventually, large-scale buyers start moving into the downtrodden stock. Their accumulation of shares reduces supply and increases demand. The stock's price will rise and form the right side (recovery) of the base. With enough accumulation, the tension between supply and demand will (hopefully) give way to a stock's breakout to further gains.
Studies of winning stocks reveal several successful price patterns that repeat themselves.
The most common are the cup without handle, flat base, cup with handle and the double bottom. Additionally, there are less-common patterns such as the high-tight flag, IPO bases, the saucer, and the ascending base.
When identifying bases, start by determining depth and duration. A flat base can form in as little as five weeks. A cup base needs six weeks. All others require seven weeks. Begin counting with the first week down of a price contraction after a stock makes a price high.
As for depth of bases, a correction of 15% or less is likely a flat base. Double bottom and cup bases tend to correct between 15% and 33%. Any deeper, they become more failure prone and should be avoided. In bear markets, deeper bases can still work out.
These patterns and more are discussed in greater detail in IBD's online education resources.
How To Invest: ServiceNow's Slam Dunk
ServiceNow began a 14-week cup-with-handle base in February 2023. The 14-week base's handle was nearly as deep as the whole base, but still acceptable (1).
Volume dried up as the stock held support at the 40-week moving average for most of the base. Volume returned the following week as investors rushed in and ServiceNow cleared 485.58 buy point (2).
By late July, the stock had a gain of 26% and began another base. The 15-week flat base (3) was another textbook set up. Volume dried up in the middle before picking up again for another breakout in November (4). Despite its wavy shape, the pattern's 14% decline fit the mold of a flat base. ServiceNow had gains of 32% before consolidating once more in February 2024.
