Based on William J. O'Neil, How to Make Money in Stocks (4th Edition, 2009)
How to Make Money in Stocks is the comprehensive reference for William J. O'Neil's CAN SLIM system. Now in its fourth edition (2009), the book incorporates over 125 years of market research — every stock that made a gain of 100% or more, catalogued and analyzed for common characteristics before the move began. Where 24 Essential Lessons is a condensed workbook, this book is the complete operating manual.
The fourth edition adds:
O'Neil's methodology is entirely empirical. He did not begin with a hypothesis about what should work. He began with outcomes — the stocks that actually produced the greatest gains — and worked backward to identify what they had in common before the advance. The sample covers every market cycle from the 1880s through 2008:
RESEARCH METHOD:
1. Identify every stock that doubled or more in a given cycle.
2. Catalogue fundamentals: earnings growth, sales growth, margins, ROE, new products.
3. Catalogue technicals: price pattern before breakout, volume, relative strength.
4. Catalogue market conditions: general market trend at time of breakout.
5. Catalogue institutional activity: number of funds buying, quality of sponsors.
6. Synthesize into a repeatable, rules-based system.
The result is CAN SLIM — seven characteristics that the vast majority of winning stocks shared before their major price advances. Each letter represents one measurable criterion.
1. BUY RIGHT, SIT TIGHT — The entry point determines everything. A great stock bought at the
wrong time or price will lose you money.
2. HISTORY REPEATS — Human nature does not change. The same patterns that preceded major
advances in 1910 precede them today.
3. CUT ALL LOSSES AT 7-8% — Non-negotiable. No exceptions. No hoping. No averaging down.
4. MARKET DIRECTION FIRST — Three out of four stocks follow the general market direction.
You must be in sync with the market's primary trend.
5. USE BOTH FUNDAMENTALS — CAN SLIM combines fundamental strength (C, A, N, S) with
AND TECHNICALS technical timing (L, I, M). Neither alone is sufficient.
Each letter of CAN SLIM represents one criterion. All seven should be present simultaneously in an ideal buy candidate. O'Neil is explicit about specific numerical thresholds throughout the book.
The single most important fundamental criterion. O'Neil's research shows that 75% of the best performing stocks in the study showed earnings-per-share increases of at least 70% in the most recent quarter before their major price advance.
REQUIREMENTS:
- Current quarter EPS growth >= 25% year-over-year (absolute minimum).
- Prefer 40-50% or higher. The best stocks showed 100-500%+ growth.
- Growth must be from CONTINUING OPERATIONS, not one-time events (asset sales, tax benefits).
- Earnings quality matters: confirm that sales are also growing (at least 25%).
- If the most recent quarter shows a deceleration from prior quarters, be cautious.
Example: Q1 +100%, Q2 +80%, Q3 +50% = decelerating, even though still strong.
- Compare quarter to the SAME quarter of the prior year (year-over-year), not sequentially.
- Watch for "consensus beat" — the stock should beat analyst estimates, ideally by a wide margin.
RED FLAGS:
- Earnings growth driven solely by cost-cutting, not revenue growth.
- One-time gains inflating EPS.
- Earnings growing but revenue flat or declining.
- Company consistently lowering guidance then "beating" the lowered bar.
The best stocks show a pattern of annual earnings growth over the prior 3-5 years.
REQUIREMENTS:
- Annual EPS growth rate of 25% or more over each of the last 3 years.
- Prefer an accelerating pattern: e.g., +25%, +30%, +40%.
- Annual return on equity (ROE) >= 17%. The best show 25-50%+.
- Look for a "consensus" between annual and quarterly numbers:
Strong annual trend PLUS strong current quarter = best candidates.
- If a company had one "down" year in the last 5, the next year's earnings should have
recovered to a new high, showing resilience.
IBD METRIC — EPS RATING:
- IBD's EPS Rating (1-99) combines current and annual earnings growth into a single score.
- Target stocks with EPS Rating >= 80, preferably >= 85.
- An EPS Rating of 80 means the company's combined earnings record is better than 80% of
all publicly traded companies.
The "N" factor is the catalyst. O'Neil found that 95% of the greatest winning stocks had something genuinely new driving their advance.
TYPES OF "NEW":
1. NEW PRODUCT OR SERVICE — A breakthrough product creating a new market or dominating an
existing one. Examples from the book: Apple's iPod/iPhone, Google's search advertising,
Cisco's routers, Microsoft's Windows.
2. NEW MANAGEMENT — A turnaround led by new leadership with a clear vision. The company's
fundamentals should already show improvement under the new team.
3. NEW INDUSTRY CONDITIONS — A regulatory change, a shift in consumer behavior, a new
technology platform that creates opportunity for the entire group.
4. NEW PRICE HIGHS — This is counterintuitive but critical. Stocks making new 52-week highs
tend to go higher. Stocks making new lows tend to go lower. O'Neil's research is emphatic:
"What seems too high usually goes higher, and what seems too low usually goes lower."
KEY PRINCIPLE:
- Do NOT buy stocks that are "cheap" or "beaten down." The correct time to buy is when the
stock emerges from a proper base pattern into new high ground, not when it looks like a
bargain on decline.
The law of supply and demand governs stock prices. Fewer shares outstanding means less supply, which means price moves more on increased demand.
WHAT TO LOOK FOR:
- Companies with a reasonable number of shares outstanding. O'Neil historically favored
companies with fewer than 500 million shares, though this has evolved over time.
- BIG VOLUME ON BREAKOUT: The day a stock breaks out of a base, volume should be at least
40-50% above its 50-day average volume. This confirms institutional demand.
- Volume should DRY UP during the base formation (quiet accumulation) and then SPIKE on the
breakout day (institutions committing capital).
- Share buyback programs are a positive — they reduce supply.
- Avoid stocks with enormous float (multiple billions of shares) unless they show unusually
heavy institutional accumulation.
VOLUME INTERPRETATION:
- Price up on heavy volume = demand (bullish).
- Price down on heavy volume = supply/distribution (bearish).
- Price up on light volume = no conviction (neutral to cautious).
- Price down on light volume = normal pullback, not concerning.
Buy the number one or number two company in a leading industry group. Never buy laggards.
REQUIREMENTS:
- IBD Relative Strength (RS) Rating >= 80, preferably >= 85 or 90.
- The RS Rating ranks a stock's price performance over the last 12 months relative to all
other stocks. A rating of 90 means the stock has outperformed 90% of all stocks.
- O'Neil's research: the average RS Rating of the best-performing stocks at the time of their
breakout was 87.
RULES:
- NEVER buy a stock with an RS Rating below 70. Period.
- Within an industry group, buy the #1 stock — the one with the best earnings, best RS Rating,
best chart pattern. Do not buy a "cheaper" stock in the same group hoping for a sympathy play.
- If you own a stock and its RS Rating is declining while a competitor in the same group has a
rising RS Rating, consider switching to the leader.
- Relative Strength LINE (not just the rating) should be at or near a new high at the time of
the stock's price breakout. If the RS line is lagging, the breakout is lower quality.
You want stocks that are being bought by the best institutional investors — not just any fund.
REQUIREMENTS:
- At least a few institutional sponsors (mutual funds, pension funds, etc.).
- Focus on QUALITY of sponsorship: top-performing funds with strong long-term records.
- Number of institutional owners should be INCREASING in recent quarters.
A stock with 400 fund holders last quarter and 420 this quarter is better than one with
500 holders shrinking to 480.
- Check the TREND: increasing institutional interest = accumulation.
Decreasing institutional interest = distribution/selling.
IBD METRICS:
- Accumulation/Distribution Rating: A or B = institutional accumulation (buying).
C = neutral. D or E = institutional distribution (selling).
- Sponsorship Rating: measures the quality and trend of institutional holders.
- Target: A/D Rating of A or B. Number of sponsors increasing quarter over quarter.
WARNING SIGNS:
- A stock that is "over-owned" — when every large fund already owns it, there are no new
buyers left. Who is left to buy? This typically happens after a long advance, in 3rd or
4th stage bases.
- Watch for top funds SELLING. If the best-performing fund managers are reducing positions,
pay close attention.
This is the most important factor. Three out of four stocks follow the general market direction. Even the best CAN SLIM stock will fail in a bear market. Detailed treatment in Section 9.
SUMMARY:
- You must determine whether the market is in a CONFIRMED UPTREND, UPTREND UNDER PRESSURE,
or MARKET IN CORRECTION.
- Buy stocks ONLY during a confirmed uptrend.
- Reduce exposure and stop buying when the uptrend comes under pressure.
- Move to cash and protect gains when the market is in correction.
- The tools for determining market direction: follow-through days (to confirm a new uptrend)
and distribution day counting (to identify a topping market).
- Covered in full detail in Section 9 of this document.
A "base" is a consolidation pattern — a period of correction and sideways trading — that occurs after a prior advance. Bases represent periods where the stock digests gains, weak holders sell, and strong institutional hands accumulate. When the stock breaks out of the base on heavy volume, the advance resumes.
O'Neil identifies seven primary base patterns. Each has specific rules for identification.
The most common and most reliable pattern. Named for its resemblance to a coffee cup viewed from the side.
STRUCTURE:
- DURATION: Minimum 7 weeks (can last 6-65 weeks; most are 3-6 months).
- DEPTH: Correction from peak to trough of 12-33%. In bear markets, can be 40-50%.
Corrections deeper than 50% are faulty — the stock has been too damaged.
- LEFT SIDE: Price declines from a prior high on increasing volume. This is the "selling" phase.
- BOTTOM: Volume dries up. Price finds support and begins to round upward. The bottom should
be relatively smooth and "U-shaped," not a sharp V-bottom (V-bottoms are failure-prone).
- RIGHT SIDE: Price advances back toward the prior high. Volume should generally decrease
as it forms the right side, showing quiet accumulation.
- HANDLE: A small, 1-4 week pullback from the right side peak. The handle should:
* Drift DOWNWARD (not upward — an upward handle is a wedging pattern, which is negative).
* Correct no more than 10-15% from the handle's high to low.
* Form in the UPPER HALF of the overall base (a handle forming too low means the stock
couldn't recover enough — it's weak).
* Show volume drying up to below-average levels (the last weak holders shaking out).
- BUY POINT: The high of the handle + $0.10. This is called the "pivot point."
IDEAL CHARACTERISTICS:
- Prior uptrend of at least 30% before the base began.
- Tight price action (small daily ranges) in the handle.
- Relative Strength line at or near a new high as the stock approaches the buy point.
- Heavy volume (50%+ above average) on the breakout day.
Same as the cup-with-handle, but the stock breaks out directly without forming a handle.
STRUCTURE:
- Identical to cup-with-handle in depth, duration, and shape.
- No handle forms — price moves directly past the left side high.
- BUY POINT: The peak of the left side of the cup (the prior high) + $0.10.
NOTES:
- Generally considered slightly less reliable than the cup-with-handle because the handle
serves to shake out final weak holders. Without it, there may be more overhead supply.
- Still a valid pattern, especially in strongly trending markets.
A "W" shaped pattern where the stock tests its low twice before advancing.
STRUCTURE:
- DURATION: Minimum 7 weeks.
- DEPTH: Similar to the cup — 12-33%, up to 40-50% in bear markets.
- FIRST LEG DOWN: Price declines from a prior high to a low point.
- RALLY: Price bounces back partway (does not need to reach the prior high).
- SECOND LEG DOWN: Price declines again. The SECOND LOW should undercut the first low —
this is critical. An undercut of the first low shakes out weak holders who set stops at
the prior low. This "shakeout" is what makes the pattern valid.
- RECOVERY: Price rallies from the second low.
- BUY POINT: The middle peak of the "W" (the high point of the rally between the two lows)
+ $0.10.
KEY RULE:
- The second bottom MUST undercut the first bottom, even if only by a few cents. If it does
not, it is not a proper double bottom — it could be a flat base or a different formation.
- A handle may also form on the right side of a double bottom, creating a modified pattern.
The handle rules are the same as for the cup-with-handle.
A tight sideways consolidation showing very little correction.
STRUCTURE:
- DURATION: Minimum 5 weeks.
- DEPTH: No more than 10-15% correction from high to low.
- The stock moves sideways in a narrow range. This typically occurs AFTER a breakout from
a prior base (cup, double bottom) — it is a "continuation" pattern within an existing trend.
- BUY POINT: The high of the flat base range + $0.10.
SIGNIFICANCE:
- Flat bases show tremendous strength — the stock refuses to correct significantly even
while the market may be pulling back.
- They often form as second or third stage bases within a longer advance.
- Because they correct so little, the buy point is close to the current price, which means
the 7-8% stop-loss is tight and risk is well-defined.
The rarest and most powerful pattern. O'Neil calls it the pattern that can produce the largest gains in the shortest time.
STRUCTURE:
- PRIOR ADVANCE: The stock must have advanced 100-120% or more in a very short period
(typically 4-8 weeks). This explosive move is the "flagpole."
- CONSOLIDATION: The stock then corrects 10-25% over 3-5 weeks in a tight, sideways-to-
slightly-down pattern. This is the "flag."
- BUY POINT: The high of the flag portion + $0.10.
KEY CHARACTERISTICS:
- This pattern is very rare — it occurs only in the most exceptional stocks during the most
powerful market advances.
- The 100%+ move in weeks demonstrates extraordinary demand.
- The shallow correction (10-25%) despite such a massive run shows that holders are not
selling — they believe in the stock's future and refuse to take profits.
- Examples from O'Neil: Qualcomm in 1999, Google in 2004.
WARNING:
- Because the stock has already doubled, many investors feel it is "too high." This is
precisely the kind of thinking O'Neil warns against. The best stocks often double and
then double again.
A series of three pullbacks, each with a higher low, stair-stepping upward.
STRUCTURE:
- DURATION: 9-16 weeks typically.
- The stock makes three pullbacks of approximately 10-20% each.
- Each pullback low is HIGHER than the prior pullback low.
- The pattern "ascends" — it slopes upward from left to right.
- BUY POINT: The high of the third pullback's recovery + $0.10.
CONTEXT:
- Ascending bases typically form while the general market is in a correction or under
pressure. The stock is strong enough to keep making higher lows even as the market pulls
back — a sign of exceptional institutional support.
- If the stock can hold and ascend while everything else is declining, it will often be
one of the first to break out powerfully when the market confirms a new uptrend.
A longer, more gradual version of the cup-with-handle.
STRUCTURE:
- DURATION: Typically longer than a cup — often 3-6 months or more, sometimes much longer.
- DEPTH: Can be shallow (12-20%) to moderate (20-33%).
- The "saucer" is a wide, slow, rounded bottom — the curve is more gradual than a cup.
- A handle forms on the right side, following the same rules as the cup-with-handle.
- BUY POINT: High of the handle + $0.10.
CHARACTERISTICS:
- Saucer bases tend to form in larger-capitalization, more institutional stocks that take
longer to accumulate.
- The slow, gentle rounding shows patient, persistent accumulation by large funds over
an extended period.
- Less volatile than cups, but the breakouts can be just as powerful.
Not a separate base type, but a significant structural concept.
DESCRIPTION:
- When a stock forms a base, breaks out, advances 10-20% but is unable to make a full
25%+ advance before correcting back into a new base.
- The second base forms partially or entirely ABOVE the prior base.
- This often occurs when the general market is weak — the stock is trying to advance but
the market is pulling it back. The stock's strength is demonstrated by its refusal to
drop all the way back into or below the prior base.
- The breakout from the second (upper) base is the buy point.
- The base count does NOT advance — a base-on-base counts as the same stage as the
base beneath it.
O'Neil's research shows that the probability of a successful breakout decreases with each successive base. First and second bases are highest probability. Third bases are acceptable but require greater caution. Fourth bases and beyond frequently fail.
BASE COUNTING RULES:
1st BASE: Forms after an extended decline or long period of inactivity. This is the stock
emerging from a "Stage 1" bottoming phase. HIGHEST probability.
2nd BASE: Forms after a successful breakout and advance from the 1st base. The stock
corrects, builds a new base, and breaks out again. HIGH probability.
3rd BASE: The stock has now made two successful breakouts and advances. It corrects again.
The 3rd base is ACCEPTABLE but be more demanding — require better fundamentals,
tighter pattern, and heavier volume.
4th BASE: Significantly higher failure rate. By this point, the stock's advance is "mature"
and widely recognized. Late-stage bases are where institutions begin distributing
(selling) to retail investors. AVOID or use extreme caution.
5th+ BASE: Very high failure rate. The stock is almost certainly in a late-stage topping
pattern. Do not buy.
A base count RESETS to 1 under these conditions:
1. The stock declines enough to undercut the low of a prior base. This is a "base failure"
— the stock must rebuild from scratch. The next proper base becomes a new 1st base.
2. The stock undergoes a bear market decline (typically 50%+ from peak) and then
eventually forms a new base. The base count resets.
3. A very long period of consolidation (multiple years) that essentially "resets" the
stock's pattern.
A base count does NOT reset if:
- The stock forms a base-on-base (same count as the base below).
- The stock simply has a shallow pullback that doesn't undercut any prior base low.
O'Neil's base counting aligns with Stan Weinstein's stage analysis concept:
Stage 1: Basing / Accumulation — The stock is flat after a decline. Smart money accumulates.
Stage 2: Advancing — The stock is trending up, forming and breaking out of bases.
Stage 3: Topping / Distribution — Late-stage bases. Institutions sell to retail.
Stage 4: Declining — Downtrend. Do not buy.
The pivot point (also called the buy point) is the precise price at which a stock breaks out of a properly formed base pattern. It is calculated as:
PIVOT POINT = Highest price in the base pattern's handle (or top of the base if no handle)
+ $0.10
For each pattern:
- Cup-with-handle: High of the handle + $0.10
- Cup-without-handle: Left side peak of the cup + $0.10
- Double bottom: Middle peak of the W + $0.10
- Flat base: High of the flat range + $0.10
- High tight flag: High of the flag portion + $0.10
- Ascending base: High of the 3rd recovery + $0.10
- Saucer with handle: High of the handle + $0.10
BUY ZONE RULE:
- You may purchase the stock from the pivot point up to 5% above the pivot point.
- NEVER chase a stock more than 5% beyond the pivot. If you missed the breakout, wait
for the next proper base or a pullback to the 10-week moving average.
EXAMPLE:
Pivot point = $50.10
Maximum buy price = $50.10 x 1.05 = $52.61
If the stock is at $53.00, you have missed it. Do NOT chase.
WHY 5%?
- If you buy at the pivot and the stock fails, your maximum loss with a 7-8% stop is
about 7-8%. If you buy 5% above the pivot and it fails, your loss could be 12-13% —
too much. The 5% limit keeps risk manageable.
PULLBACK TO 10-WEEK MOVING AVERAGE:
- After a successful breakout, a stock may pull back to its 10-week (50-day) moving
average on below-average volume and then bounce.
- This is a secondary buy point for adding to a position or initiating a position if
you missed the breakout.
- Volume should dry up on the pullback and increase on the bounce.
- The first and second pullbacks to the 10-week line are the most reliable. Third and
later pullbacks have lower success rates.
THREE-WEEKS-TIGHT:
- If a stock closes within approximately 1-1.5% of its prior week's close for three
consecutive weeks, it forms a "three weeks tight" pattern.
- This shows extraordinary holding conviction — no one is selling.
- Buy point: high of the three-week-tight area + $0.10.
- This is a continuation pattern, used to add to an existing position.
Volume is the X-ray of the market. It reveals whether institutions — the entities that actually move stock prices — are buying or selling.
MINIMUM: Volume on the breakout day should be at least 40-50% above the stock's 50-day
average daily volume.
IDEAL: 100% or more above average — a decisive, unambiguous show of institutional demand.
CALCULATION:
50-day average volume = 1,000,000 shares
Minimum breakout volume = 1,400,000 - 1,500,000 shares
Ideal breakout volume = 2,000,000+ shares
IF VOLUME IS BELOW 40% ABOVE AVERAGE:
- The breakout is suspect. It may lack institutional support.
- If you buy, use a tighter stop-loss.
- If volume does not increase within the first few days after breakout, consider selling.
HEALTHY BASE VOLUME PATTERN:
- Volume should generally DECREASE as the base forms. This is called "volume dry-up."
- Decreasing volume means selling pressure is exhausting itself — the weak holders are
done selling, and the stock is being quietly accumulated.
- Heavy volume on down days WITHIN the base is negative — it shows aggressive distribution.
- Light volume on down days and slightly heavier volume on up days within the base = ideal.
- Volume should remain above average for several days to weeks after the breakout.
This confirms sustained institutional buying, not just a one-day event.
- "Volume churn" at highs (very heavy volume but no price progress) is a warning sign
of institutional distribution — big players selling into demand.
The 7-8% loss-cutting rule is O'Neil's paramount rule. He dedicates more pages to selling discipline than to any other topic, because it is where most investors fail.
RULE: If a stock declines 7-8% below your purchase price, sell IMMEDIATELY. No exceptions.
EXAMPLE:
Buy price = $50.00
7% stop = $50.00 x 0.93 = $46.50
8% stop = $50.00 x 0.92 = $46.00
If the stock hits $46.00-$46.50, sell that day.
WHY 7-8%?
- O'Neil's research shows that stocks bought at a proper buy point from a correct base
pattern almost never decline 7-8% and then go on to become big winners. A decline of
that magnitude from a proper pivot almost always means something is wrong.
- If you are buying at the proper pivot with proper volume, the stock should move in your
favor almost immediately. If it reverses and hits -7-8%, the pattern has failed.
CRITICAL RULES:
- The stop is measured from YOUR PURCHASE PRICE, not from the pivot point.
- NEVER average down. Do not buy more of a stock that is declining below your buy point.
- NEVER lower your stop-loss after setting it. Only raise it (or move to a profit-protecting
stop after the stock has advanced).
- Do NOT set the stop at exactly -7% or -8% and tell yourself you'll "wait one more day."
The line is absolute.
SELL IF:
- The stock breaks below its 50-day (10-week) moving average on HEAVY volume and cannot
recover above it within 1-2 days.
- The stock has a sudden, sharp price break on the heaviest volume in months.
- The stock "gaps down" on earnings or other news. Sell into the opening or the first
bounce. Do not hold and hope.
- The stock undercuts a prior base low (base failure).
RULE: If a stock has given you a gain of 10-15% or more and then REVERSES all the way back
to your purchase price, SELL. Do not let a decent gain turn into a loss.
This is a separate rule from the 7-8% stop. It addresses the psychological difficulty of
watching a profit evaporate. O'Neil says this is one of the most painful and common mistakes:
a stock advances 15%, the investor doesn't sell, then it declines back to even, and the
investor holds because they "don't want to take a loss" — and then it drops further.
RULE: Once a stock has advanced 20-25% from the proper buy point, take at least partial
profits — unless the stock reached that gain within 1-3 weeks of the breakout.
RATIONALE:
- Most stocks correct after a 20-25% advance. If you take profits, you lock in the gain
and have cash ready for the next opportunity.
- Over time, a series of 20-25% gains with losses cut at 7-8% produces outstanding results.
The math: three 20% gains vs. one 7% loss = net +53% gain on the winning cycle.
THE 8-WEEK HOLD RULE (Exception to the 20-25% rule):
- If a stock advances 20%+ from its buy point within the first 1-3 weeks of the breakout,
DO NOT SELL. Hold it for at least 8 weeks from the breakout date.
- A stock that gains 20% in under 3 weeks has enormous momentum. These are potential
"big leaders" — the stocks that might double or triple. Taking a quick 20% profit on
these stocks is leaving life-changing gains on the table.
- After the 8-week hold period, reassess. If the stock is still acting well (holding above
the 10-week line, strong RS, strong fundamentals), continue to hold.
When a stock you own begins showing climax-top signals, it is time to sell all of your position. These signals mark the final, euphoric blow-off phase of an advance.
CLIMAX TOP SIGNALS:
1. LARGEST DAILY PRICE RUN: After advancing for many weeks or months, the stock suddenly
has its largest one-day price advance since the breakout. This is the "exhaustion gap"
or blow-off move. The stock looks like it's going to the moon — and that's the moment
the smart money is unloading.
2. EXHAUSTION GAP: The stock gaps up on the open on very heavy volume, often on news or
an earnings report. It may close near its high that day. This "climax gap" after an
extended advance is a sell signal.
3. WIDE-AND-LOOSE ACTION: After many months of tight, controlled advancing, the stock
begins to have much wider weekly price ranges. The "spread" between the weekly high and
low becomes dramatically larger. This signals that volatility is increasing at the top.
4. RAILROAD TRACKS / CHURNING: Very heavy volume but no price progress over several days
or weeks. This is "distribution" — institutions are selling massive amounts of stock,
but new buyers are (temporarily) absorbing it, keeping the price flat. Eventually
buyers are exhausted and the stock collapses.
5. CHANNEL LINE ACCELERATION: If you draw a trend channel around the stock's advance, and
the stock suddenly breaks ABOVE the upper channel line on heavy volume, this is often
a blow-off. Counterintuitively, breaking above the channel is a sell signal.
6. 200-DAY MOVING AVERAGE DISTANCE: If the stock is trading 70-100%+ above its 200-day
moving average, it is extremely extended and vulnerable to a sharp correction.
HOLDING RULES FOR BIG WINNERS:
1. After 8-week hold period, use the 10-week moving average as your guide.
- As long as the stock closes above the 10-week line (or pulls back to it and bounces
on volume), continue to hold.
- If it closes below the 10-week line on heavy volume and stays below for 2+ weeks,
sell at least a partial position.
2. As gains accumulate (50%, 100%, 200%+), progressively tighten your sell signals:
- Look for climax top signals.
- Watch for late-stage base failures (3rd, 4th base breakouts that fail).
- Monitor for earnings deceleration (quarterly EPS growth slowing).
3. Lock in BIG gains when you have them. A 100% gain is rare and valuable. A 200% gain
is extraordinary. Do not give back large gains.
THREE FACTS:
1. 3 out of 4 stocks follow the general market direction.
2. You cannot ignore the market and trade individual stocks in isolation.
3. Every bear market begins while fundamentals still look good. You must use PRICE AND
VOLUME action to detect distribution before the decline becomes obvious.
A follow-through day is the signal that a market correction may be ending and a new uptrend is beginning. Without a follow-through day, you do NOT begin buying stocks.
FOLLOW-THROUGH DAY RULES:
1. PREREQUISITE: The market must first attempt a rally. This is identified by a major index
(S&P 500, NASDAQ Composite) closing higher on one day. This day is "Day 1" of the
attempted rally. The low of Day 1 (or the low of the correction, whichever is lower)
must NOT be undercut in subsequent days. If it is, the attempted rally fails and you
restart the count with the next rally attempt.
2. TIMING: A follow-through day can occur on Day 4 or later of the attempted rally.
Follow-through days on Days 4-7 are most common. Days 1-3 are too early and don't count.
Follow-throughs after Day 10+ can still work but have a lower success rate.
3. THE SIGNAL: On Day 4 or later, a major index must advance with a significant gain
(typically 1.5% or more, though O'Neil does not give a rigid number — he says the gain
should be "clearly powerful") on volume HIGHER than the prior day's volume.
4. CONFIRMATION: One follow-through day is enough to shift from "market in correction"
to "confirmed uptrend" — but you should begin buying gradually, not all at once.
Start with one or two positions and add only if they work.
IMPORTANT CAVEATS:
- Not every follow-through day leads to a sustained uptrend. Approximately 25% fail.
This is acceptable because the cost of a false signal is small (you buy 1-2 stocks and
stop out at -7-8%), while the cost of missing a real new uptrend is enormous.
- There has NEVER been a significant bull market that did NOT begin with a follow-through day.
It is a necessary condition, even if not a sufficient one.
Distribution days are the primary tool for detecting when a market uptrend is ending.
DISTRIBUTION DAY DEFINITION:
- A major index (S&P 500 or NASDAQ) declines 0.2% or more on volume HIGHER than the
prior day's volume.
- This indicates institutional selling (distribution) — large funds are liquidating
positions, and the heavier volume reveals it.
COUNTING RULES:
- Begin counting distribution days from the follow-through day that confirmed the uptrend.
- Distribution days EXPIRE after 25 trading days (approximately 5 weeks). A distribution
day that occurred 26 or more trading days ago is removed from the count.
- A distribution day is also removed if the index advances far enough above the distribution
day's close (typically 5%+), rendering that day's selling irrelevant.
WARNING THRESHOLDS:
- 4-5 distribution days within a 25-day window on either the S&P 500 or NASDAQ = the
market uptrend is "under pressure." Become cautious. Stop buying and tighten stops.
- 6+ distribution days = high probability the market is topping. Shift to "market in
correction" status. Sell weak positions. Raise cash.
- CLUSTERING of distribution days (several within a 1-2 week period) is especially
dangerous — it indicates urgent, aggressive institutional selling.
STALLING DAYS:
- A stalling day is a form of distribution where the index closes UP but in the lower
portion of its daily range on HEAVIER volume. The index tried to advance but sellers
emerged and capped the gain.
- Stalling days count as distribution days in the count.
The Power Trend is a concept refined in the 4th edition for identifying exceptionally strong bull markets where the investor should be heavily invested and slower to sell.
POWER TREND CONDITIONS:
1. The 21-day exponential moving average is above the 50-day simple moving average.
2. The 50-day simple moving average is above the 200-day simple moving average.
3. The 200-day simple moving average is trending upward.
4. The index has closed above the 21-day EMA for at least 10+ consecutive days, or has
not closed below the 50-day SMA during the uptrend.
WHEN IN A POWER TREND:
- Be more aggressive in position sizing.
- Give winning stocks more room — consider holding through 10-week moving average tests
rather than selling.
- Do not prematurely take 20-25% profits on stocks with exceptional strength.
- Allow your best stocks to develop into 100%+ gains.
- The power trend remains in effect until the 21-day EMA closes below the 50-day SMA
or the index closes below the 50-day SMA.
O'Neil's research reveals that approximately 37% of a stock's price movement is directly tied to the performance of its industry group, and another 12% is attributable to its overall sector. That means roughly half of a stock's move is determined by the company it keeps.
RULES:
- Focus on stocks in the top 40-50 industry groups (out of IBD's 197 groups) ranked by
6-month relative price performance.
- Avoid stocks in groups ranked in the bottom quartile — even great companies in weak
groups will struggle.
- When a new bull market begins, identify which groups are leading. The first groups to
break out and show heavy volume typically lead for weeks or months.
- The best stocks are usually the #1 or #2 performers in a leading group.
GROUP ROTATION:
- After a group has led for several months, it will eventually rotate to the laggard list.
Do not hold group leaders indefinitely — sell when the group begins underperforming.
- In market corrections, watch for which groups hold up best. These "relative strength"
leaders will often be the first to break out when the market turns back up.
- When the #1 stock in a group breaks out, the #2 and #3 stocks will often follow within
days or weeks. Watch for group breakouts — multiple stocks in the same group all forming
bases and approaching pivots simultaneously.
- However, ALWAYS buy the leader first. Do not buy the #3 stock because it's "cheaper."
The leader will usually make the biggest gain.
WHAT TO CHECK:
1. Number of institutional holders: increasing quarter-over-quarter?
2. Quality of holders: are top-ranked funds (Fidelity, T. Rowe Price, etc.) buying?
3. Are the best-performing funds of the last 1-3 years accumulating the stock?
4. IBD Accumulation/Distribution Rating: A or B is required. C is neutral. D or E is
disqualifying — institutions are selling.
5. Number of fund holders as a percentage of float: if too many funds already own it
(over-owned), there are no marginal buyers left.
INSTITUTIONAL FOOTPRINTS:
- A stock that rises on unusually heavy volume (50%+ above average) without news is likely
being accumulated by institutions. They are buying large blocks quietly.
- A stock that declines on heavy volume, especially after a long advance, is being distributed.
Institutions are selling into whatever demand exists.
- "Pocket pivots" — days where the stock advances on volume greater than any DOWN volume
day in the prior 10 sessions — indicate institutional accumulation.
The Model Book is O'Neil's method for studying past winning stocks to train your pattern recognition. It is the single most important educational tool in the CAN SLIM methodology.
HOW TO BUILD A MODEL BOOK:
1. IDENTIFY PAST WINNERS: Find every stock that doubled or more in a given market cycle.
Sources: IBD's archives, O'Neil's own published examples, historical chart services.
2. PRINT THE CHARTS: Get weekly charts showing price and volume for the period BEFORE the
stock's major advance (covering the base formation and breakout) and DURING the advance.
3. MARK THE BUY POINT: Draw a line at the exact pivot point. Annotate the chart with:
- The type of base (cup-with-handle, double bottom, etc.).
- The base number (1st, 2nd, 3rd base).
- The depth and duration of the base.
- The volume on the breakout day vs. average.
- The RS Rating and EPS Rating at the time.
4. MARK THE SELL POINT: Annotate where the optimal sell point was. Note:
- Which sell signal triggered (climax top, break of 10-week line, etc.).
- How much profit was available from buy to sell.
5. STUDY THE FUNDAMENTALS: For each stock, record:
- Quarterly EPS growth in the 2-3 quarters before the breakout.
- Annual EPS growth rate over the prior 3-5 years.
- Sales growth.
- ROE.
- The "N" factor — what was new about the company.
- Industry group rank at the time.
- Number of institutional sponsors and trend.
6. REPEAT ACROSS CYCLES: Build models from the 1950s, 1960s, 1970s, 1980s, 1990s, 2000s.
The patterns are consistent across all eras.
LESSONS FROM HISTORICAL MODELS:
1. PATTERNS ARE UNIVERSAL: The same cup-with-handle pattern that preceded Syntex's advance
in 1963 preceded Apple's advance in 2004 and Google's advance in 2004.
2. FUNDAMENTALS ARE CONSISTENT: Nearly all had quarterly EPS growth of 25%+ (most 50%+),
annual EPS growth of 25%+, high ROE, and strong sales growth.
3. NEW PRODUCTS DRIVE ADVANCES: Virtually every major winner had a new product, service,
or business model that was changing its industry.
4. MARKET TIMING MATTERS: Most big winners broke out early in a new market cycle, within
the first few months after a follow-through day.
5. EARLY BASES WIN: The majority of the biggest gains came from 1st and 2nd base breakouts,
not 3rd or 4th.
6. SELL SIGNALS ARE RELIABLE: Climax tops, distribution, and breaks of the 10-week line
consistently marked the end of major advances.
O'Neil recommends studying at least 500 historical examples before trading real money.
This is not a suggestion — he considers it essential training. The purpose is to burn
the patterns into your subconscious so that you can recognize them instantly in real-time.
O'Neil devotes significant pages to the mistakes that cause most investors to underperform.
MISTAKE #1: BUYING ON THE WAY DOWN
"Stocks that look cheap keep getting cheaper." Investors buy declining stocks because
they appear to be bargains. O'Neil says this is the #1 mistake. Buy stocks making new
highs out of proper bases, not stocks making new lows.
MISTAKE #2: FAILING TO CUT LOSSES AT 7-8%
"The whole secret to winning in the stock market is to lose the least amount possible
when you're not right." Most investors hold losers hoping for recovery. Small losses
become large losses. Large losses become catastrophic.
MISTAKE #3: AVERAGING DOWN
Buying more of a losing stock to lower your average cost guarantees that your largest
position is in your worst-performing stock.
MISTAKE #4: BUYING CHEAP STOCKS (LOW PRICE PER SHARE)
Stocks trading under $10-15/share are cheap for a reason. Institutional investors — the
buyers who drive major advances — generally avoid low-priced stocks. Focus on stocks
trading $20-$100+.
MISTAKE #5: WANTING TO BUY ON TIPS AND RUMORS
Buying based on what someone "heard" rather than what the data shows. The CAN SLIM
criteria are specific and measurable. Use them, not tips.
MISTAKE #6: BUYING BECAUSE OF DIVIDENDS OR LOW P/E RATIOS
Dividends and low P/E ratios are irrelevant for growth stocks. The fastest-growing
companies often have high P/E ratios — the market is pricing in future growth. O'Neil
found that the average P/E of the best-performing stocks at their breakout point was
higher than the market average, not lower.
MISTAKE #7: NOT WATCHING THE MARKET DIRECTION
Buying individual stocks without checking the M factor. Three out of four stocks follow
the general market. If the market is in correction, even the best stocks will fail.
MISTAKE #8: BEING UNWILLING TO BUY AT NEW HIGHS
Psychological resistance to buying stocks at 52-week or all-time highs. O'Neil's data
shows this is precisely when you should buy — when a stock emerges from a proper base
into new high ground.
MISTAKE #9: SELLING WINNERS TOO EARLY, HOLDING LOSERS TOO LONG
The disposition effect. Investors sell their best stocks to "lock in" a small profit and
hold their worst stocks to "avoid a loss." This is the exact opposite of what works.
Cut losers fast. Let winners run.
MISTAKE #10: EXCESSIVE DIVERSIFICATION
Owning 20-30 stocks makes it impossible to know any of them well. O'Neil recommends
concentrating in 4-8 stocks maximum for most investors. If you have conviction, position
size accordingly.
MISTAKE #11: NOT USING CHARTS
"Charts record the actual supply and demand for a stock." Refusing to look at charts is
like a doctor refusing to look at X-rays. Charts show what institutions are doing —
accumulating or distributing — and no other tool provides this information.
MISTAKE #12: BUYING DURING A MARKET CORRECTION
Rationalizing "bargain" purchases during a confirmed downtrend. The correct action during
a market correction is to sit in cash and wait for a follow-through day.
SCENARIO: Finding and managing a CAN SLIM stock from discovery to exit.
STEP 1: MARKET DIRECTION CHECK
- Date: Hypothetical. The market experienced a correction (NASDAQ down 15% over 8 weeks).
- Day 1 of rally attempt: NASDAQ closes up 1.2% after undercutting the correction low.
- Day 4: NASDAQ advances 2.3% on volume higher than Day 3. Volume is also above the
50-day average. THIS IS A FOLLOW-THROUGH DAY.
- Status: "Confirmed uptrend." Begin searching for buy candidates.
STEP 2: CAN SLIM SCREENING
- Screen for stocks with:
C: Current quarter EPS growth >= 25% (preferably 40%+)
A: Annual EPS growth >= 25% over 3 years; ROE >= 17%
N: New product or service driving growth
S: IBD Accumulation/Distribution Rating of A or B
L: RS Rating >= 80 (preferably >= 85)
I: Number of institutional holders increasing; quality sponsors present
M: Confirmed uptrend (checked above)
- Stock XYZ passes all criteria:
* Current quarter EPS: +85% YoY
* Annual EPS growth: 3 years of +30%, +45%, +55%
* ROE: 28%
* New product: revolutionary cloud platform gaining enterprise adoption
* A/D Rating: A
* RS Rating: 92
* 40 institutional holders last quarter, 58 this quarter
* Industry group: #8 out of 197
STEP 3: CHART PATTERN IDENTIFICATION
- XYZ has formed a 14-week cup-with-handle pattern.
- Cup depth: 28% from peak to trough. Within acceptable range (12-33%).
- Handle: 3 weeks long, drifting downward, correcting 9% from handle high to low.
- Handle is in the upper half of the base.
- Volume dried up to 40% below average during the handle.
- This is a 1st-stage base (stock is emerging from a long period of inactivity).
- Pivot point: Handle high of $74.90 + $0.10 = $75.00.
STEP 4: EXECUTION
- XYZ trades through $75.00 on Tuesday at 10:15 AM.
- Volume by midday is already 80% of the full-day average. Projected end-of-day volume
is approximately 200% of the 50-day average. STRONG.
- Buy 500 shares at $75.25 (within the 5% buy zone; max buy = $78.75).
- Set stop-loss: $75.25 x 0.92 = $69.23. Will sell if it hits this level.
- Position size: approximately 15% of portfolio.
STEP 5: POSITION MANAGEMENT
- Week 1: XYZ advances to $79.50. Gain = +5.6%. Volume remains above average. Hold.
- Week 2: XYZ pulls back to $77.00. Volume is below average on the pullback. Normal. Hold.
- Week 3: XYZ advances to $84.00. Gain = +11.6%. Still holding above 10-week line. Hold.
- Week 5: XYZ hits $91.00. Gain = +20.9% in 5 weeks. This is the 20-25% target range.
BUT the gain reached 20% within the first 3 weeks. INVOKE THE 8-WEEK HOLD RULE.
Do not sell. Hold for at least 8 weeks from breakout date.
- Week 8: XYZ is at $98.50. Gain = +30.9%. 8-week hold period complete.
Stock is still above the 10-week moving average. RS Rating is 95. Continue holding.
STEP 6: CONTINUED HOLDING / BIG WINNER MANAGEMENT
- Week 12: XYZ has advanced to $112.00. Gain = +48.8%.
Stock forms a flat base (5 weeks, 8% deep) and breaks out to new highs. This is the
2nd-stage base. Could add to the position here with a smaller addition.
- Week 20: XYZ reaches $135.00. Gain = +79.4%.
10-week moving average is at $118.00. Stock is acting well. Continue holding.
STEP 7: SELL SIGNALS EMERGE
- Week 26: XYZ gaps up $12 on an earnings beat — the largest single-day advance since the
breakout. Volume is the highest in 6 months. CLIMAX TOP SIGNAL #1.
- Week 27: XYZ has its widest weekly price range ever: high $158, low $141.
CLIMAX TOP SIGNAL #2 (wide and loose).
- Week 27: Volume is extremely heavy but price ends the week roughly flat.
CLIMAX TOP SIGNAL #3 (churning / railroad tracks).
- Decision: SELL ENTIRE POSITION at $152.00.
- Final gain: ($152.00 - $75.25) / $75.25 = +102%.
- Duration: 27 weeks (approximately 6.5 months).
RESULT SUMMARY:
Buy: $75.25
Sell: $152.00
Gain: +102%
Risk: Was limited to -8% ($69.23 stop) = a 12.8:1 reward-to-risk ratio.
"What seems too high and risky to the majority usually goes higher, and what seems low
and cheap usually goes lower."
"The whole secret to winning in the stock market is to lose the least amount possible
when you're not right."
"The first and paramount rule of selling is: Cut every loss short. This is the most
important investment lesson you can ever learn."
"Buying a stock as it goes to a new high off a sound chart pattern with big volume is
the single most effective way to make money in stocks."
"Individual investors get into trouble because they are either not aware of the general
market direction, or they fight it. Three out of four stocks follow the market's trend."
"I would rather buy a stock at $60 a share on the way up than at $30 on the way down."
"The market does not know or care what you paid for a stock. It is not going to go back
up just because you are losing money."
"Averaging down is an amateur strategy that can produce serious losses."
"You must study past stock market leaders and learn how to spot and identify stocks with
the potential to become future big winners. This is critical to investment success."
"You should buy stocks like you buy groceries, not like you buy perfume."
[Meaning: invest based on substance and value, not glamour and excitement.]
"Charts are simply a picture of supply and demand. Why would you not want to look at
that picture?"
"It's not whether you're right or wrong that's important, but how much money you make
when you're right and how much you lose when you're wrong."
"Your objective isn't to buy at the lowest price or sell at the highest price. It is to
buy and sell at the RIGHT price."
"The best stocks are never cheap. You have to get over the notion that a stock selling
at a high price is expensive and one selling at a low price is cheap."
"If you want to be successful, study success — not failure."
[Referring to the Model Book method of studying historical winners.]
=========================================================================
CAN SLIM QUICK REFERENCE
=========================================================================
C Current EPS growth >= 25% YoY (prefer 40-100%+)
A Annual EPS growth >= 25% each of last 3 yrs; ROE >= 17%
N New product/management + stock near or at 52-week high
S Supply & demand A/D Rating A or B; volume on breakout 50%+ above avg
L Leader RS Rating >= 80 (prefer 85+); #1 in group
I Institutional sponsorship Increasing holders; quality funds buying
M Market direction Confirmed uptrend (follow-through day confirmed)
BASE PATTERNS:
Cup-with-handle 7+ weeks 12-33% deep Handle 1-4 weeks, <15% deep
Cup-without-handle 7+ weeks 12-33% deep No handle; buy at left peak + $0.10
Double bottom 7+ weeks 12-33% deep 2nd low MUST undercut 1st low
Flat base 5+ weeks <15% deep Continuation pattern
High tight flag 100%+ run 10-25% flag Rarest, most powerful
Ascending base 9-16 weeks 3 pullbacks Each low higher than the last
Saucer w/ handle Months+ 12-33% deep Slow, gradual rounding bottom
BUY RULES:
Buy at pivot point (base high + $0.10)
Buy zone: pivot to pivot + 5%. NEVER chase beyond 5%.
Volume on breakout >= 40-50% above 50-day average
SELL RULES (DEFENSE):
Cut ALL losses at 7-8% below purchase price. No exceptions.
Sell if round-trip (10%+ gain returns to breakeven).
Sell on heavy-volume break below 50-day MA.
SELL RULES (OFFENSE):
Take profits at 20-25% (unless 20% reached within 3 weeks — then hold 8 weeks).
Sell on climax top signals (exhaustion gap, widest range, churning, channel break).
Use 10-week MA as trailing guide for big winners.
MARKET DIRECTION:
Follow-through day: Day 4+ of rally, index up ~1.5%+ on higher volume.
Distribution day: Index down >= 0.2% on higher volume.
4-5 distribution days in 25-day window = uptrend under pressure.
6+ distribution days = correction. Raise cash.
Power trend: 21 EMA > 50 SMA > 200 SMA, all rising. Be aggressive.
BASE COUNTING:
1st base = highest probability. 2nd = high. 3rd = acceptable.
4th+ = high failure rate. AVOID.
Count resets if stock undercuts prior base low or has bear-market decline.
=========================================================================