Are you new to investing in CAN SLIM powerhouse stocks? Do you want to use stock charts to improve market timing and make more money in stocks? Here’s one simple yet important concept to master: How much does a stock correct in price after it peaks? And how can I calculate that quickly?
In general, you want to see a budding stock market leader fall much less than what it gained in its prior move. This is not an investing rule but intuitively, this makes sense. All stocks take a break, but the best ones do not suffer as much institutional selling as weak stocks.
When you form your watchlist of great stocks, first seek evidence that they can really move up. Demand that they gain 30% or more from any price point. Then study stocks that drop no more than 15% from its 52-week peak. Such sideways price action may generate a flat base. A decline in the 16% to 33% range? Then sharpen your eyes for a potential cup pattern or double bottom to form.
To quantify the correction within the base, subtract the lowest price from the highest price. Divide the difference by the high. Multiply by 100 to get a percentage.
Boston Beer, Stock Market Leader In 2020
Boston Beer (SAM) benefited in 2020 from strong grocery sales as Covid-19 forced restaurants to close or restrict operations. The brewer of the iconic Samuel Adams lager has built a tremendous retail network; it’s paid off lately.
From the week ended Feb. 21 to the week ended March 20, 2020, Boston Beer plunged from 433.62 to 290.02 (1). It slumped well below key technical levels, including the 50-day moving average and the longer-term 200-day line. Big-time selling for sure. Yet, was the decline reasonable? Yes.
The decline of 143.6 points translates to a correction of 33% — 143.6 divided by 433.62, multiplied by 100. That actually meets the maximum decline typically allowed for a good cup base. Fall any harder than that, and it just gets tougher for a stock to rise all the way back to its old highs. Remember, a stock that drops 50% from 100 would have to double to recoup all of that loss.
An even faster way to size up the correction? Divide low by high, then subtract by 1. Multiply by 100 to get the percentage decline. MarketSmith’s pattern recognition premium tool shows the correction size of any base that it discovers on the daily and weekly charts.
Stock Market Timing After The Coronavirus Crash’s Bottom
The stock saw lighter volume on down days in late March to April as it built the right side of its cup. And before the breakout, the relative strength line rose past the highest peak within the base itself. That symbolized unusual power.
This article was originally published Oct. 15, 2020, and was updated. Please follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, chart analysis, bases, breakouts and sell signals.
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