William O'Neil

Asked who shaped his thinking, O'Neil names Gerald Loeb, whose The Battle for Investment Survival taught him to stay market-oriented, and Jesse Livermore, whose Reminiscences of a Stock Operator he still considers valuable. His rule for reading is selective: there are only about five, six, maybe seven books really worth reading, and they should come from people who have actually made money in the markets. He looked for practitioners who were excelling, met them when he could, and tried to learn what they were doing rather than collecting theory.

"There are only about five, six, maybe seven books that are really worth reading."

O'Neil says the great traders he studied shared humility — they made enough mistakes to learn how to overcome them — and they were market-oriented rather than theoretical. The first investor he noticed was Jack Dreyfus, whose fund was outperforming every other fund; O'Neil visited the office and found a chartist with daily charts posted around the room and a tape running through the accounting department. When he plotted Dreyfus's quarterly holdings, every stock had a chart pattern and Dreyfus never bought anything unless it was going into new high ground. That observation became one of the foundations of CANSLIM: bases form through institutional accumulation, and the stock emerges from the base and breaks out to new highs before the biggest moves.

"There's a certain amount of humility because you have to make enough mistakes."

O'Neil argues that market patterns repeat because human behavior repeats: the cup with handle and flat base he finds in modern leaders are the same shapes visible in Tennessee Coal in the late 1800s and Apple in 2004. Different people make the patterns in every era — pools and old barons a century ago, mutual funds today — but the accumulation and breakout behavior is unchanged. He says this is why studying market history matters: the patterns have been there for 80 years and more, and most people miss them because they are too lazy or rely on someone else's opinion. The CANSLIM system is his codification of those recurring traits, not an invention.

"The patterns you see today were there 20 years ago, 40 years ago, 60 years ago, 80 years ago."

O'Neil explains how he finds a potential triple: he flips through hundreds of charts until one shows a base under accumulation and is acting stronger than the rest, then checks the fundamentals. He wants earnings up 40%, 50% or 100% — not 10% or 15% — plus strong sales, a unique product he can understand, good profit margins and return on equity. The process works because a big fund taking a 3% position in a $2 billion portfolio may spend six to ten weeks buying, and that institutional accumulation is what forms the chart pattern. Charts are the screen; the earnings and the new product are what make the stock go up.

"It's not charts that make the stock go up; it's the big earnings and the new product."

O'Neil describes the turn after a correction: once the market produces a follow-through day, the strongest stock of the cycle often breaks out that same day or forms a small handle and emerges a few weeks later. He wants to buy something on the follow-through day because the best leaders have been suppressed by the negative market and come up fast when institutions start buying. The 2009 bottom is his example: Green Mountain Coffee Roasters, Netflix and Apple broke out quickly after the follow-through day. The lesson is to be prepared and objective at the turn rather than waiting for the economy to look good.

"The strongest stock will probably break out on that day."

Asked whether corrections excite him, O'Neil says he does not enjoy watching the market fall, but he can be very bearish and two days later very bullish depending on what has occurred. He refuses to get fixed in his opinions because opinions are not worth much; the market itself is the evidence. When he buys two or three stocks at a turn, the market quickly ranks them — the one up 10% is a bigger leader than the one up 5% — so he lets price action tell him which is the best stock rather than deciding in advance.

"You don't want to get fixed in your opinions, because your opinions aren't worth much."

In part two, O'Neil addresses holding winners: he does not hold many stocks for long, but when he buys a base with earnings and sales support he can sit through volatility because he understands the business. He prefers retail and drug stocks over high-tech for that reason, and recommends reviewing trades to see where you actually made the most money. Pick n Save was an early example — a tiny over-the-counter retailer with a perfect cup with handle and earnings up 35% a quarter — and Price Club was another: he waited through a correction for a proper base and rode an eight- to tenfold advance. The common thread is a unique concept that can be expanded city by city, not a copycat.

"I've always liked retail stocks and drug stocks because I could understand them."

O'Neil opens with the S&P 500 and the days when volume rose while the index closed lower. Years ago three or four such distribution days were enough; the market's size has pushed the count to five or six within roughly five weeks. That cluster signals supply overwhelming demand, and history says the market rolls over. He does not try to predict the depth of the decline; he watches the trend and starts selling stocks and raising cash as the distribution builds, with the cash level depending on the stocks he owns.

"This is simply just looking at a broad index and looking at the law of supply and demand, where you're getting more supply coming in and giving ground in a short span of time."

After a decline, O'Neil ignores the first, second, and usually the third day of a rally because any bounce can last a few days. From the fourth day he looks for a follow-through: a big volume increase and a major gain in the index. The news at that moment is usually terrible, which is why most people hesitate. He starts buying late on the follow-through day, because the biggest moves come from follow-throughs and the stocks that break out in the first one to three weeks are usually the leaders.

"When I can see it's going to be a follow-through, I'll be buying something because I don't want to miss out."

The 2008–2009 decline was so steep that many growth stocks fell 60–90%, producing unusually deep cup-with-handle bases. O'Neil shows a current market that has rallied for almost a year but is now under distribution; he is selling some stocks and sitting with a few he believes in, including Apple. He accepts occasional whipsaws because the alternative—missing a follow-through—is worse. In a normal uptrend he would buy four to six stocks; after a whipsaw he buys only one or two, backs out if it fails, and waits for the next follow-through.

"I've learned to never argue with follow-through days, even if you get whipsawed and it fails a few days later."

Asked why his institutional leader service underperformed, O'Neil points to the character of the March 2009 bottom. The 58% decline over 17 months was the third-largest correction in about 125 years, an outright panic. Stocks that had sold at $50–70 fell to $1–4, and the percentage bounce from those levels was enormous. Value stocks therefore made progress first; growth stocks did not start to show until later.

"A $4 stock goes to $12—that's a pretty big percentage. So the value people made real progress, and your growth stocks didn't start to show so much until a little bit later."

O'Neil introduces ten stocks from the service that were actionable around the March 2009 follow-through. The first is an unnamed stock modeled on Chrysler and Xerox in 1962. On the left side of a would-be cup, the stock falls in three waves. At the bottom, five consecutive weeks close unchanged on significant volume—heavy volume without further progress, which he reads as institutional support. It then rallies, rolls over, makes a second low, and later a third; after three waves, almost everyone who can be scared out has been.

"There were five weeks in a row when you got way down and you had undercut a prior low where you closed unchanged, and this was on some significant volume. This is what we call heavy volume without further progress on the way down."

On the daily chart O'Neil applies the old Livermore rule: if a $30 stock undercuts a low and then climbs back through it by three points, the move establishes a new buy point. For this roughly $90 stock he scales the threshold to about six points. The stock also shows four tight weeks near the low, a rally, and then a pullback where volume rises but the close falls less—another sign of support. Its relative strength line turns up before the market, and the stock then rises nine weeks in a row before forming a handle and a second buy point.

"It's the old Livermore rule: if you have a $30 stock and it penetrates a low and it comes back up through that low by three points, that establishes a new buy point."

Netflix formed a small cup with a handle, with its prior uptrend in the September 2008 quarter. The handle went sideways for two or three weeks on good volume. O'Neil stresses that none of these stocks had weak fundamentals: big earnings, big sales or high return on equity, sponsorship, and a story all aligned. Netflix held up better than most in the crash, and its relative strength line reached new highs long before the stock did—evidence it was bucking the market all the way down.

"The relative strength line went into new high ground way, way before the stock did, so it was bucking the rest of the market all the way down."

Amazon came onto the service six days before the follow-through. On the left side, five red weeks carry rising volume, but the last two fall less than the prior week and the final red week has the highest volume without much price damage—institutional support. After a false follow-through and a new market low, the stock shows three unchanged weekly closes, then a pullback where volume dries up at the low. Enormous volume returns with closes at the weekly peak. The fundamentals show 149% earnings growth, 39% and 29% sales growth, and a 33% return on equity; the PE of 43 does not stop the buy.

"We don't ever let a PE ratio tell us not to buy a stock if everything else is right, because that's arguing with the market and telling the market it doesn't know what it's doing."

Green Mountain was not a deep pattern; it held up and reached new high ground early. Up weeks carry huge volume, and three or four tight weekly closes show accumulation. It came onto the service two days after the follow-through as it broke out of a cup with a handle. The fundamentals: earnings growth of 62%, 38%, and 97%, sales up 56%, return on equity 19% (he wants 17% minimum and 25–50% ideally), pre-tax margin 7%, and eight quarters of increasing mutual fund sponsorship. The PE was 50. O'Neil's point is that PE is a personal opinion; the earnings, sales, return on equity, and story are what matter. A tight three-week close after a run can be an add point, but he does not add more than his original position size.

"You must understand what is the story—what's the product of this company, why is it so unique, does it make sense?"

The institutional service carried 80–100 names across two books. Each week only two or three were at or near a buy point, so the skill is weeding out the so-so charts and focusing on the potential leaders. Cerner is more conservative: three weeks tied at the left-side low, then five weeks down where volume rises and the third week closes well off its low—40% or more off the low is major support. Later the stock holds above its low while the market makes new lows, with tight closes and rising relative strength. O'Neil then explains why most people miss the first leg off a bear-market bottom: they are too scared to buy, wait for a pullback that never comes, and finally buy after the move.

"You have to weed down, and that's why the skill in chart reading helps you weed out those that are so-so and focus on the ones that could tend to be the very biggest leaders."

VistaPrint was a thin stock with strong numbers: annual growth of 44% and 51%, last two quarters up 36% and 66%, sales up 44% and 32%, and a solid return on equity. O'Neil uses it to make a broader point: reading charts is a learned skill, like playing the piano or basketball. You have to practice, study examples, and keep looking until the details become recognizable. There is no shortcut.

"You can learn to do that. It's just like anything else—it's like playing the piano or playing basketball. You've got to practice, practice, practice."

O'Neil normally avoids semiconductor stocks because they are twice as volatile, but CREE was acting better than the others off the bottom and had actual earnings: five straight up quarters, the last two up 50% and 43%, sales up 24%, pre-tax margin 12%, and a PE of 41. The relative strength line made a new high weeks before the stock broke out. He points to the black weeks—he calls them skyscrapers—where volume was above average, showing accumulation for weeks. The handle drifted down, which is what he wants; a handle drifting up along the lows is a warning.

"You don't want the handles to be drifting up along the low. You want it to be drifting down."

Priceline shows the same support pattern at the bottom: three tight weeks, a high-volume up week, and a pullback on lighter volume. Then, while the averages make new lows in February, the stock moves up against the market on huge volume. It breaks out with earnings up 48%, 99%, and 48% in recent quarters, the last quarter up 34%, and a 44% return on equity, in the middle of a 17-month bear market and a recession. O'Neil notes the phases of a breakout: the first works, the second often works, but a third-phase breakout is obvious and more likely to fail. After the stock doubles, some institutions start trimming.

"At some point you have a first phase of breaking out, a second phase, and then when you start getting a third phase, now it's getting obvious—and those may fail."

Baidu corrected about 70%—more than the S&P's 58%—and was extremely volatile. At the bottom it found support on a heavy black week, drifted down on lighter volume, and turned up. It then rose nine weeks in a row, most weeks closing near the peak, before O'Neil and his team recognized the steady institutional buying. They put it on the service at $200. It kept closing at weekly peaks for perhaps 12–15 weeks before its first down week, then formed a handle where the second red week fell less than the first and closed in the upper part of a tight range on higher volume.

"Baidu is a very violent stock, much more volatile than most, and you can see the enormous correction it had."

Ctrip shows the same supply-and-demand signature: heavy volume on up weeks, closes near the weekly peak, tight areas during consolidation, and a proper handle. The fundamentals are exceptional—rapid earnings growth across recent quarters and years, last-quarter sales up 21%, return on equity 35%, and pre-tax margins of 46%. O'Neil's point is that the target is the top one or two percent of stocks; a 50-name list may contain only two, three, or four real leaders.

"What you're looking for is the top one or two percent of the stocks in the market."

Express Scripts held up through the 58% correction because of a consistent record: 88% return on equity, rising pre-tax margins and ROE for eight years, and eight quarters of increased fund sponsorship. On its final break it undercut the January low around $49.50 but did not go down substantially. When it climbed back through that low by three points—around $52.50—O'Neil bought. The Livermore formula says the recovery through the old low proves the breakdown was false and establishes a new uptrend and a buy point.

"By the time you get back up through that low by three points, you've determined that that was a false breakdown, and you've established a new uptrend. That's a buy point."

O'Neil's closing lesson from the ten charts: study as many models as you can. Patterns repeat because the market is supply and demand and big professionals—mutual funds now, JP Morgan's pools in 1910—create them. He says the firm has 125 years of patterns. The deep cups that confused people in this cycle were made by the 58% correction; the worse the correction, the deeper the base. The characteristics are the same, just a bigger cup with a handle, and buying came off the rounding bottom because few stocks were at a conventional breakout point.

"The patterns are all made by correction in the market, and the worse the correction, the deeper some of those patterns are going to be."

O'Neil recommends a chart service—Daily Graphs, about to be renamed MarketSmith—and a chart book. Build models from past winners and study them. The newest edition of How to Make Money in Stocks opens with 100 annotated charts from 1880 to the present, with page references that compare a 1925 RCA pattern to a 1965 pattern. The point is that very few people know patterns repeat, and the details—a handle wedging up, adverse volume in the wrong place—are what separate a real base from something that only looks like one.

"This is something that very few people know or do: the patterns repeat themselves. All you have to do is learn what a lot of the successful ones look like in the past."

O'Neil tells the audience to get How to Make Money in Stocks and read it three or four times; a single pass will not stick because there are too many patterns and details. Newcomers should read the first chapter, reread it, take notes, and not move on until they understand it. The second discipline is an annual review: for the first two or three years, go back through every trade, post the charts, mark buys and sells in red, separate the winners from the mistakes, and study the one that got away. The goal is to write a new rule for the situation you mishandled.

"You must look at what you're doing and evaluate so you can figure out what you're doing wrong."

O'Neil bought CertainTeed as it ran up, got shaken out in a big shakeout, did not buy it back, and watched it double. At year-end he studied the chart and found it had run up about 20% in two weeks. He turned the mistake into a rule: if a stock breaks out of a sound pattern and gains 20% in one, two, or three weeks, hold it through the first normal pullback, which usually comes four to six weeks out—so hold at least eight weeks no matter what. A year later Syntex broke out at $100, ran 20% in three weeks, and the rule kept him in through a drop from the mid-80s to about $65; the stock then tripled in eight weeks.

"If any stock breaks out of a sound pattern and goes up 20% in either one, two, or three weeks, I must hold it through the first normal pullback."

O'Neil's execution rules: buy on the follow-through even if you get faked out, adding little by little rather than all at once. Buy exactly at the right point—not 5% or 10% after the breakout, where an 8% stop will throw you out. Sell three out of four stocks when they are up 20%, taking the short-term gain; only one or two in ten will be the big winners, and the market will tell you which ones by their action and earnings. Follow the rules strictly, ignore other services and analysts, and act like a robot.

"The more rules you can follow and be strict and just act like a robot and eliminate all the distractions."

The first questions test the eight-week rule. Baidu broke out, but O'Neil says it looked like a growth stock even though it is cyclical, and he would not normally apply the rule there. CREE broke out in the week of October 9, rose 20% in three weeks, and the question is whether to sell after eight weeks. His answer: two pieces of evidence—three weeks of tight closes and accelerating earnings—say the stock deserves more time. If nothing else, hold it eight more weeks.

"You had two different bits of evidence—the three weeks tight and the acceleration—that would tell you you've got to hold it longer."

A listener asks why the index can carry a D distribution grade for two and a half months and still rally. O'Neil says a D is not a sell signal by itself; an E (heavy distribution) would concern him more, but a D can be normal. The next question asks why the institutional leader service lagged in 2009. His answer: the service is a list of 50–100 names, not a buy list. You have to sort through and buy the three, four, or five with the best price action, patterns, and earnings. Many of the year's big winners were thin stocks with 100,000–400,000 shares trading that made violent moves; good chart readers could make 70–90%, others 25–30%, and beginners 5–15%.

"You don't buy a list of 50 or 100 stocks. You've got to sort through and buy the three or four or five that have the very best price action and right patterns and huge earnings."

On earnings season and Regulation FD, O'Neil says he does not like going into earnings because it is guesswork. The defense is to know the company backwards and forwards—product, expectations, chart, earnings, growth—so you can sit through the fear. The next question asks whether the huge deep bases and weaker earnings of this cycle justify deviating from CANSLIM. His answer is blunt: you don't deviate, period. Learn the rules and chart reading backwards and forwards, and study history. The rules are not his opinions; they were built by studying every stock that doubled or tripled each year, and they have produced 100%-plus years.

"You don't deviate, period. Learn the rules backwards and forwards and learn to read charts with great skill."

Asked how to tell a true leader from a stock to take 20% on, O'Neil says true leaders have huge earnings and keep acting better than the rest; there will be only a few. Study the patterns of the best past winners and you will recognize them sooner. He then pulls up Apple in 2004: a perfect cup with a handle, with the December 2003 quarter rounding out the bottom, moving up, and drifting down into the handle. Apple's prior record was spotty, but the chart and two quarters of 100%-plus earnings were enough. The lesson: a big leader can be bought right off the chart.

"You can come up with a big leader right off the chart, and the earnings were there for two quarters—they were up over 100%."

A listener asks about second- and third-stage bases. O'Neil repeats the rule: the first base usually works, the second often works, and the third is riskier—some work, but more fail, so the stock has to be exceptional. On the bull market, he says they do not predict; they analyze as they go. Eleven months in, they thought the move could last a year and a half to two years from the March turn, and they may be starting an intermediate correction that lasts three to six weeks. Asked about recent distribution, he says they start raising cash, with the amount depending on the stocks held.

"The first base usually works, the second one does, and the third one you've got to be a little bit careful of—it may work, it may not, but more of them will fail."

Asked how far from strict CANSLIM parameters an investor can go and still succeed, O'Neil calls himself narrow-minded and says the more you vary, the worse off you are. He compares the discipline to music, medicine, and athletics: a shortstop has to execute the double play exactly right, and small deviations cost the out. Investors should not veer into point-and-figure, candlesticks, or a pile of other services. The rules are not beliefs; they were measured against every model, and they are what the successful stocks had in common.

"You're going to think that I'm a little narrow-minded, but I think the more you vary from it, the worse off you're going to be."

A listener says his main problem is overtrading and whipsawing. O'Neil's diagnosis: go back and look at where you bought. Did you buy exactly at the pivot or off the 10-week line, or were you chasing 10–15% above a sound area? If you chase, you will get whipsawed. The fix is preparation: go through a chart book on the weekend, write down the names near a buy point and the exact price, and be there when it triggers—even at work, with an alert. Check sponsorship, volume, return on equity, and whether the stock is the leader in its industry.

"If you're chasing it, you're going to get whipsawed all over the place."

An audience member admits he has lost money since starting with CANSLIM in October 2003. O'Neil tells him not to get discouraged and tells a story about one of his own portfolio managers, who was up 95% last year. In his first year, the young analyst found an earnings estimate he thought was valuable, put almost everything he had—three or four thousand dollars—into a $6 stock, watched it fall to $3, panicked, sold at a 50% loss, and then saw the company go bankrupt. Everyone goes through it. The response is to make the mistakes, write them down, plot them on a chart, and derive one or two new rules.

"I would never get discouraged... We all go through that. You have to make the mistakes, and sometimes you make a lot of them."

Asked what separates people who succeed with the system from those who fail, O'Neil says you have to look at yourself. You cannot blame the broker, your wife, your girlfriend, or your brother; you have to study where you bought and sold and whether you followed the system. Learn through trial and error and turn your weakness into a strength. The final question asks whether portfolio rules should change by stock type. No: there is no reason to lose more than 8%, and with skill the average loss should be 5–6%. The rules came from a thousand models; earnings should be up at least 20%, return on equity ideally 25–50%, and margins can substitute when ROE is low.

"You can't blame the broker or your wife or girlfriend or your brother or something else. You've got to look at where you bought a stock and where you sold it and study the system."