William O'Neil and CAN SLIM: the seven letters, explained

The short version

William O'Neil looked at the biggest winning stocks of several decades, studied what they had in common just before their largest moves, and wrote the answer down as seven letters: C A N S L I M. Strong current and annual earnings, something new, demand for the shares, market leadership, institutional buying, and a market heading up.

The method joins two things that are often kept apart: a growing business and a stock that is already acting well. O'Neil wanted both at once, and he wanted to own them only when the market was rising.

Who he was

O'Neil (1933 to 2023) started as a stockbroker in the 1950s and spent his early career studying past market winners. At 30 he bought a seat on the New York Stock Exchange, reportedly the youngest person to do so at the time, and founded William O'Neil + Co., a research firm that built one of the first large databases of stock prices and company numbers. In 1984 he started Investor's Daily, later renamed Investor's Business Daily, which still publishes the ratings his method relies on.

His book, How to Make Money in Stocks, came out in 1988 and has been revised several times. It is where CAN SLIM is set out in full, along with the chart patterns and selling rules that go with it.

The seven letters

C: current quarterly earnings. The latest quarter's earnings per share should be well up on the same quarter a year earlier. O'Neil asked for at least 25%, and preferred growth that was speeding up from one quarter to the next. Sales should be growing too, so the profit does not come from cost cutting alone.

A: annual earnings growth. One good quarter can be luck. He wanted annual earnings up strongly in each of the last three years, typically 25% a year or more, and a return on equity of 17% or more as a check on the quality of the business.

N: something new. A new product, new management, a change in the industry, or a new price high. His studies found that the biggest winners were usually making new highs as their big moves began, which is the opposite of what bargain hunters look for.

S: supply and demand. Price moves when demand for the shares outruns supply. He looked for heavy volume on up days and light volume on down days, signs that large buyers were accumulating the stock.

L: leader or laggard. Own the leading stocks in the leading industries, not the cheaper laggards. He measured leadership with a relative strength rating from 1 to 99 and preferred stocks rated 80 or higher. Our RS rank answers the same question for NSE stocks.

I: institutional sponsorship. Big moves need big buyers: mutual funds, pension funds, insurers. He wanted a stock held by some good institutions, with the number of holders rising. In India, the monthly portfolios of mutual funds show this directly; see what funds bought last month.

M: market direction. Three out of four stocks, he found, move with the general market. So the first question is whether the market is in a confirmed uptrend. If it is not, the other six letters matter much less.

The base and the breakout

The letters tell O'Neil which stocks to watch. The chart tells him when. He waited for a stock to form a base, a period of weeks or months in which the price moves sideways and the selling dries up, and entered as it broke out of that base on heavy volume.

His best-known base is the cup with handle. The price falls and recovers in a rounded U shape over seven weeks or more, the cup, then dips slightly near the old high on light volume, the handle, before breaking out above it. He also described flat bases, double bottoms and the rare high tight flag, a stock that doubles in a few weeks and then rests.

Reading the market

O'Neil judged the market from the major indexes, day by day. Two signals carry most of the weight.

Distribution days are days when an index falls on heavier volume than the day before. A cluster of them within a few weeks means large investors are selling, and often comes before a top.

A follow-through day is the signal that a new uptrend has begun. After a decline, the market tries to rally; a few days into that attempt, a strong gain on higher volume than the day before confirms it. Not every follow-through works, but nearly every new bull market in his studies started with one.

Our market timing page gives a read of the NSE after every close, built on breadth across all stocks rather than an index alone.

The loss rule

O'Neil's most quoted rule is about selling. Sell any stock that falls 7 to 8% below your purchase price, every time, with no exceptions and no waiting for it to come back. His reasoning: even good investors are wrong often, and a small loss is easy to recover while a large one is not.

He also took profits on the way up, often selling most of a position after a gain of 20 to 25%, unless the stock had risen that far very quickly, which he took as a sign of a bigger winner worth holding.

Running CAN SLIM on the NSE

The method transfers to India well, with some care over the data.

Earnings. Quarterly results are published for every listed company, so C can be measured directly. Be careful with small companies: a jump from a low base can show growth of several hundred percent and mean little.

Annual growth. Three years of steady annual growth is the hardest letter to check from free data. Our screen uses return on equity, which O'Neil also asked for, as its measure of A.

Institutions. Indian mutual funds publish their full portfolios every month, which is more often than many markets require, and makes the I letter easier to read than in O'Neil's day.

Liquidity. Many NSE stocks trade too thinly for the volume signals in S to mean much. Keep to stocks with steady daily turnover.