MS PatternRecManual 1-7-5

MarketSmith
Pattern Recognition
Users Manual
Pattern Recognition spotlights any of seven existing or emerging base

patterns on MarketSmith Daily and Weekly stock charts. Learning to
identify these base patterns adds an important aspect of technical
stock analysis to your most important investment decisions, particularly
optimum buy and sell points. Pattern Recognition also displays data points
related to the highlighted pattern, including the base count, depth of base,
pivot point, and much more.
Using Pattern Recognition Pattern Recognition On
XX TURNING ON PATTERN RECOGNITION
Turn on Pattern Recognition by clicking the Pattern
Recognition icon in the Chart Toolbar. Pattern Recognition will
automatically display base patterns on Daily and Weekly stock
charts. (Not all charts will have base patterns.)
Note: Pattern Recognition is not available for index, industry group, futures,
or mutual fund charts.
Pattern Recognition Off
XX VIEWING BASE PATTERN PROPERTIES

Pattern Recognition includes base properties in a hover box to
help you effectively analyze the quality of a base. To view the
hover box, place your cursor on the base pattern.
XX BASE PATTERN TYPE

Available base patterns: Cup, Cup with Handle, Saucer, Saucer
with Handle, Double Bottom, Flat Base, Ascending Base,
Consolidation and IPO Base.
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Using Pattern Recognition
XX STAGE
It is important to know where a stock is positioned in relation to the number of bases it has formed. Stages
begin at one and increase with each subsequent base pattern formed. Stocks emerging from third, fourth,
or later stage bases are late in their moves and may be more likely to fail. Breakouts from first and second
stage bases generally have a higher probability of success.
The magnitude of the move between two base patterns will determine whether the stage moves
numerically or alphabetically. If the price move from the pivot point of the prior base to the left side high
of the current base is 20% or more, the stage will increase by a factor of 1—for example, from Stage 1 to
Stage 2. If the price move is less than 20%, the stage will increase by an alphabetic factor—Stage 1a to
Stage 1b.
XX BASE RESET
The Base Stage and Count are always
reset to 1 when an intraday low price
undercuts the low of the previous base.
Currently, this is the only scenario that
resets the base count.

XX COUNT
The Count is the number displayed in ( ) to the right of the
Stage. Count begins at 1 and increases numerically with each
new base pattern, regardless of the magnitude. It is the raw
count of the number of bases since the last reset. At this time,
the Pattern Recognition software does not take into account
bear or bull markets when counting bases.
Note: IPO Bases do not display either Stage or Count, as neither is
applicable for that particular pattern.
XX PIVOT
The Pivot is indicated for each base. This value corresponds
to the dashed Pivot Line. The raw value is marked without any
additional amount added (e.g., 10 cents).
The Pivot of a base corresponds to a previous area of
resistance. In the case of a Cup (or Saucer) With Handle, it
corresponds to the peak price of the handle. In the case of
a Double Bottom, the Pivot corresponds to the top of the
middle peak of the W shape. In the case of a Cup, Flat Base,
Consolidation, or IPO Base, the Pivot corresponds to the Left
Side High that began the base. When a stock breaks above
this level of resistance, it may be poised to move higher.
XX LENGTH
The length (in days or weeks) of the base is measured from
the first day the pattern begins (left side high) up to, but not
including, the breakout day. If a base pattern exceeds the
maximum allowed length of time without breaking out, the
pattern ceases but remains on the chart and a (max) label is
added.
XX DEPTH
The percent decline from the start of the base (left side high)
to the bottom (intraday low) of the base.
XX HANDLE
The percent decline from the left side high of the handle to the
bottom (intraday low) of the handle.
XX PULLBACKS 1, 2, 3 (ASCENDING BASE ONLY)
The depth (percent decline) of each pullback as a part of an
Ascending Base. Measured from the left side high of each
pullback to the bottom (intraday low).
XX % TO PIVOT
Once a pivot point is determined, the % to Pivot maintains the
% difference between the stock’s current price and the pivot
point. As the base develops, the % to Pivot is displayed in
black in the top right corner of both Daily and Weekly charts.
XX % FROM PIVOT
The % from Pivot displays the % difference between the
current price and pivot point in addition to the number of
days or weeks (depending on whether you are viewing a Daily
or Weekly chart) since the pivot was achieved. If the stock’s
current price is greater than or equal to the pivot, the % from
Pivot will be blue. If the stock’s current price is less than the
pivot, the % from Pivot will be magenta.
XX POWER FROM PIVOT FLAG

Stocks advancing in price 20% or more within 15 days (3
weeks) of the pivot point are marked with the Power from
Pivot Flag. This type of powerful action following the breakout
from a well-formed base may indicate that further strength
can be reasonably expected. Under this circumstance,
investment legend William J. O’Neil encourages investors
to consider holding the stock for at least 8 weeks (from the
pivot) to fully capitalize on what may be a true winner.

XX KEY PRICE RANGES
The Profit, Pivot, and Loss Ranges are
determined from the pivot point for the
most recent base. This is a quick and
easy way to identify ideal trading zones.
The Pivot Range is 0% to 5% above the
pivot point and is highlighted in blue.
Generally, this area is where an investor
would ideally make an initial purchase.
The Profit Target Range is 20% to 25%
above the pivot point and identified
by green highlight. When a stock is
purchased at the original breakout, this is
a range to consider taking an initial profit.
The Loss Range is 5% to 8% below the
pivot point and highlighted in pink. This
range represents where investors may Key Price Ranges can be enabled/
want to cut a losing position. disabled in the Chart Tools Menu.
Key Price Ranges can be enabled or
disabled in the Chart Tools Menu.

XX TIGHT AREAS
Tight areas can often be a sign of strength within a chart. Tight
areas are highlighted blue on Weekly charts when the closing
price for at least three consecutive weeks is within a 1.5% +/-
band.
Tight areas also serve as alternate entry points for adding to
an existing position or establishing a position when an initial
breakout is missed.
Tight Areas can be enabled/disabled in the Chart Tools Menu.
XX BREAKOUT DAY HOVER:

Placing the cursor over the pattern on the chart will cause a
window to appear that includes the Price % Change and the
Volume % Change, as measured against the 50-Day Moving
Average on the day of the stock breakout. The breakout day is
the day where the price trades above the pivot price and will
only appear on a Daily chart.
XX HIGHEST VOLUME:
The highest volume in a day or week from the initial base
is marked with an orange parachute icon. (The initial base
always has a Stage and Count of 1.) If a subsequent day or
week has higher volume, without a new stage 1 base, the
highest volume icon will move to that new day/week. After
a long move from Base 1(1), the final top might occur on the
heaviest volume day from the beginning of the advance. If
the highest volume occurs early in the move and coincides
with constructive price action, this activity could be a sign of
strength.

XX RS LINE NEW HIGH
The RS Line becomes highlighted when it reaches a new 52-
week high during the building of a base or during a breakout
day/week.
XX CLOSING RANGE
The closing range for each periodicity will appear in the Track
Price Tool, which is activated by a left click anywhere on
the chart. The closing range is calculated as the percentage
difference between the closing price and the high price of the
day. For example: If a stock’s daily closing price is the high
price for that day, then the daily Closing Range will be 100%.
The Closing Range is calculated as the (Close - Low) ÷ (High -
Low).

Seven Base Patterns
XX CUP WITH HANDLE & CUP WITHOUT HANDLE
Looks like the silhouette of a cup with a handle when viewed
from the side. It is one of the most prevalent bases identified
by MarketSmith Pattern Recognition. In most but not all cases,
the bottom of the Cup should be rounded, like a U rather than
a pointed V. The U shape indicates that the stock proceeded
through a natural correction, and so will have a better
probability of success following its breakout.
As the stock approaches new highs (completing the right side
of the cup), it will often pull back and have one last shakeout
before advancing further. This represents the handle area of the
base.
Cup With Handle patterns can last from 6 to 65 weeks, with
depths ranging from 8% to 50%.
Cups Without Handles have slightly higher failure rates, partly
because they do not experience a final shakeout before their
breakout. Those investors normally shaken out during the
development of a handle sell after the breakout, thus increasing
chances of a failed breakout. However, there are some Cup
patterns that do advance successfully without forming a handle.
When no handle occurs, the pattern is labeled as a Cup.
Cup Without Handle patterns can last from 6 to 65 weeks, with
depths ranging from 8% to 50%.
XX SAUCER WITH HANDLE & SAUCER WITHOUT HANDLE

Similar to a Cup With Handle, the Saucer With Handle tends
to develop over a longer period of time and exhibits less depth.
The Saucer With Handle is more typically found among large-
cap stocks. Saucer With Handle patterns last at least 18 weeks,
with depths less than 25%.
When no handle occurs, the pattern is marked simply as a
Saucer.

Seven Base Patterns
XX DOUBLE BOTTOM:
Its shape resembles the letter W, but the second bottom of
the W must undercut the first bottom. A Double Bottom can
last from 7 to 65 weeks, with depth ranges from 10% to 50%.
The pivot point is located on the top right side of the W, where
the stock is coming up after the second leg down and reaches
a price equivalent to the top of the middle peak of the W.
XX FLAT BASE
Generally moves sideways within a relatively narrow price
range. Flat bases often occur after a stock runs up after
breaking out of one of the other chart patterns.
Flat bases form over a 5 to 65 week range. The minimum
depth is 0%, with a maximum of 15%.
XX ASCENDING BASE
This price pattern is characterized by three pullbacks in price,
with the low of each pullback higher than the low of the
preceding pullback. Like Flat Bases, this pattern often occurs
after a stock breaks out of an initial base and is almost always
caused by a short-term general market sell-off.
Ascending Bases develop over 9 to 16 weeks, with each of the
three pullbacks correcting between 6% and 25%.

Seven Base Patterns
XX CONSOLIDATION
An area of resistance failing to exhibit the qualities of either a
Cup With Handle or any other defined base.
XX IPO BASE
This pattern is a relatively short and shallow area of
consolidation that occurs immediately or soon after a
company’s initial public offering (IPO).
Given their inherent youth, IPO Bases last only from 2 to 5
weeks, with a depth range from 0% to 40%. Stocks with
recent IPOs, while generally riskier, may occasionally be
attractive investments—especially if they exhibit this pattern.

Pattern Recognition Dictionary
XX LEFT SIDE HIGH
The starting point of the pattern. In most cases, it is the highest intra-day price over the last 100 days (or
20 weeks) for daily (or weekly) charts.
XX LENGTH
The minimum and maximum number of days (weeks) needed to qualify as a pattern. The minimum and
maximum values will vary across patterns. For example, the Cup with Handle pattern needs a minimum of
30 days (or 6 weeks) of data for daily (or weekly) charts.
XX DEPTH
The maximum percent change from the left side high to the bottom (lowest intra-day low) of the pattern.
The minimum and maximum values will vary across patterns. For example, Cup with Handle maximum
depth is 50% while the Flat Base maximum is 15%.
Results obtained from our Pattern Recognition tool are hypothetical

and may vary with each use and over time. Past performance of a
security does not guarantee future results or success.

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MarketSmith

Pattern Recognition spotlights any of seven existing or emerging base

Pattern Recognition Off

XX VIEWING BASE PATTERN PROPERTIES

XX BASE PATTERN TYPE

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XX POWER FROM PIVOT FLAG

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XX BREAKOUT DAY HOVER:

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XX SAUCER WITH HANDLE & SAUCER WITHOUT HANDLE

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Results obtained from our Pattern Recognition tool are hypothetical

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