Down Is Good, If It Leads To Strong Bases

• Paul Whitfield
• On 5:57 pm EDT, Friday October 30, 2009

The one redeeming factor of a correction is that what starts out as bad news can become good news.

Many stock declines will turn out to be base-building exercises.

American Superconductor (NasdaqGS:AMSC - News) is further along the construction process than many stocks.

After it gapped up in July, it immediately began forming a second-stage base. It broke out of the second base in mid-September and then fell, triggering the 8% sell rule.

But the slide morphed into a base. It's in the sixth week of that base.

The pattern is actually a base on base. When a stock begins a base before the previous base has gained 20%, it isn't considered a new base.

So this base on base is still an early, second-stage pattern.

Historically, later-stage bases are more prone to failure than early- stage bases.

The current base doesn't show a lot of accumulation, but the Relative Strength line is heading up. That means the stock is outperforming the market.

Outperformance during a correction is something worth watching.

As always, all buys are off the table until a follow-through day confirms that an uptrend is under way.

And, in most cases, you'll want to watch the base building from the sidelines rather than ride it down.

Buzz up!