Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

1.8. CHART PATTERNS

Books like How I Made $2 Million in the Stock Market, by the famous ballroom dancer Nicolas Darvas, figure into O'Neil's concepts of "bases," which Darvas termed "boxes." O'Neil, however, took it quite a bit further with his colorful, descriptive cataloguing of consolidation patterns or bases that he termed "ascending," "cup-with-handle," "double-bottom," "square box," "flat base," and "high, tight flag," among others—the chart patterns from which, as O'Neil observed, big, winning stocks emerged as they started their huge upside price romps. As well, these patterns represented the "continuation" that patterns hugely performing stocks form on the way up as they naturally and normally pause and digest their gains during an overall intermediate to longer-term price run before proceeding higher.

Like O'Neil and his bases, Darvas's "box theory" emerged from his own direct observation and study of stock charts and tables: "I started to realize that stock movements were not completely haphazard. Stocks did not fly like balloons in any direction. As if attracted by a magnet, they had a defined upward or downward trend which, once established, tended to continue. Within this trend stocks moved in a series of frames, or what I began to call boxes. They would oscillate fairly consistently between a low and a high point. The area which enclosed this up-and-down movement represented the box or frame. These boxes began to exist very clearly for me" (Nicolas Darvas, How I ...