Sometimes, bullish technical setups aren't hard to see at all.
A stock in an uptrend, for example, pauses to catch its breath, moves sideways for a bit and a flat base takes shape. Or a stock corrects 25% to 30% from its 52-week high, then starts to climb back toward its highs. One last mild shakeout and a cup-with-handle pattern is in place.
There's one pattern, though, that's not as easy to discern.
The ascending base takes shape during both market uptrends and corrections, more often during the latter. It forms after a stock breaks out of an initial base. After reaching new highs, it pulls back three times, generally over a period of nine to 16 weeks.
Each pullback can be anywhere from 10% to 20% (in some cases, a little more than 20%). It's important that both the high and the low of each pullback are higher than the preceding high and low, respectively. Buy shares when the stock breaks out past the high of the third pullback by a dime.
AOL (AOL) formed one in the first quarter of 1999 and a strong breakout followed. Wireless tech giant Qualcomm (QCOM) formed one in the second half of 1999. A huge price gain followed just before the stock's top in early 2000.
The ascending base is one of the more counterintuitive chart patterns because it looks like a stock is extended when the pattern is forming. It's common to feel like you're buying late when a stock breaks out from an ascending base. However, if it's a sound pattern, and the general market has turned or shows healthy action, then the ascending base can launch a big price move.
Taro Pharmaceutical (TARO) formed one in a 12-week period between February and May 2001. The pattern formed after the stock cleared a six-week consolidation in October 2000 1. At the time, its Earnings Per Share Rating was 91, its Relative Strength Rating was 88 and its Accumulation/Distribution Rating was B.
The first pullback was 14% 2; the second pullback was nearly 17% and the third pullback was 23%. Taro broke out during the week ended May 11, clearing a split-adjusted buy point of 28.05. Its Relative Strength Rating at the time was 98.
Taro needed a few weeks to get the rally going. Eventually, the stock more than doubled over the next 10 weeks, just ahead of a 2-for-1 stock split in late July. The stock then dropped 43% in just nine weeks.
- Information Technology