savvy investors not only know how to
spot the most profitable chart patterns
that launch big price runs but they're
also keenly aware of the psychology
behind them that's helpful in
understanding how and why virtually all
major stock moves begin after a new
chart pattern forms first take note that
chart patterns which are also known as
bases typically form after a stock has
already seen a nice gain of say 30% or
more that gain usually comes as the
broader market rallies helping lifts
most stocks but of course nothing goes
straight up forever the stock will
eventually hit resistance and begin to
pull back stocks can retreat for a
variety of reasons maybe the broader
market rally is running out of steam
maybe some large investors are selling
to lock in their profits or maybe a
company reported weaker than expected
quarterly earnings whatever the reason a
temporary pullback is not unusual by any
means it's like when you're climbing a
mountain you have to take a breather
every now and then before you start on
that next leg up stocks form bases for
the exact same reason to take a rest as
they get ready to continue their climb
now keep in mind that as the stock is
making this initial climb some investors
will buy late just before the rally ends
and the stock retreats these folks will
soon find themselves sitting on a big
loss as the stock continues to slide at
some point large investors stop selling
and start buying that stops the bleeding
and helps form the bottom of the new
chart pattern if fund managers and other
large investors see good things ahead
for the company they'll continue to pick
up shares that institutional buying
pushes the stock higher building that
right side of the base now remember
those people who bought too late and
took a big loss as the stock hit
resistance and retreated well many of
them had given up on making a profit
they just want to cut their losses or
break even
so as the stock continues to climb up
the right side of the pattern and gets
closer to the price they paid for the
stock these late investors begin to sell
and are happy to recoup most of their
losses but if the big mutual fund
managers like the prospects of the
company and its stock they'll be more
than happy to buy whatever shares these
late investors are selling and because
of that the share price will continue to
rise and then we come to a testing
ground the stock will close in on that
former level of resistance that it has
not yet been able to surpass it could be
the area on the left side of the base or
it could be at the top of what we call a
handle which is a mild pullback in the
right side of the base either way the
point is that the stock now has to prove
its strength punching above that prior
area of resistance in heavy volume would
show large investors are enthusiastic
about the stock but if the song bumps
its head against the ceiling and falls
back down that would show hesitation and
a lack of conviction among big money
managers that's why we use prior
resistance levels to identify buy points
the price at which it is optimal to
start buying shares if you stay patient
and wait until the stock punches through
that former ceiling in heavy volume
you're putting the odds of success in
your favor now new investors often ask
why you can't buy at the bottom of the
base at a lower price so you can make
more money while that's true only
hindsight is 20/20 trying to get into
early can be just as painful as buying
too late that's why you want to wait for
the stock to complete the pattern and
clear that ideal buy point that'll
significantly reduce your risk and still
leave plenty of upside potential
remember chart patterns don't mark the
end of the run they mark the beginning
of a new and profitable climb
