Breakout From A Base-On-Base Can Lead To Riveting Stock Gains
A breakout from a base-on-base pattern can be very profitable, since the formation usually occurs among the strongest stocks during a market correction. What happens in a base on base
A stock that's poised to break out to new highs can't quite get there because the market isn't cooperating. A sideways or downward trending market makes it tough for stocks to rally after breaking out.
As such, a bearish market phase can be the obstacle holding back a stock that's getting ready to run. But once that bearish period ends and the market goes into a solid uptrend, these stocks often have the potential to go on to big gains.
So even when the stock market isn't looking its best, savvy investors don't give up on their best stock candidates. In fact, a sideways or down market is a good time to refresh your watch list while waiting for the next confirmed uptrend.
"This is another example of why it's foolhardy to get upset and emotional with the market or lose your confidence," IBD founder and Chairman William O'Neil wrote in "How to Make Money in Stocks." "The next big race could be just a few months away.
How can investors check a stock's leadership status in terms of price performance? The relative strength line on both Investors.com and Leaderboard, is one such indicator. If the RS line is trending higher, the stock is outperforming the market. Likewise, if it's heading south, it's an underperformer.
A base on base may sound complicated, but is basically just two patterns that form adjacent to and almost on top of each other. Be sure you understand how to spot the primary basing patterns, such as the cup with handle, double bottom and flat base.
The second base should find support on top of, or in the upper half of, the first base in the structure. Look for tight trading, upside accumulation and the other bullish traits you look for with any base.
What if the second base corrects all the way to the low of the first one? The overall pattern is still considered a base next to a base. It tends to be weaker than those in which the second base forms in the upper half or above the first.
If the second base undercuts the low of the first base, though, it no longer counts as a base-on-base structure. In this case, the second base is viewed as a new pattern, and the base count resets to one.
O'Reilly Automotive (ORLY) had already cruised higher during a multiyear run when it paused to start working on a base in early May 2012. Down weeks in above-average volume initially outpaced heavy volume up weeks. However, two strong up weeks in heavy volume helped form the base's right side and signaled institutional accumulation (1). Shares of the car parts retailer also gapped up 9% in fast trade the week ended Feb. 8, 2013 (2).
O'Reilly traded tightly and mostly sideways for the next 2-1/2 months to shape a flat base-on-base pattern. Volume trends continued to improve. The stock broke out from the base-on-base the last week of April as it rose 7% in fast trade (3).
O'Reilly cruised 22% higher over the next three months before pausing to form another base. It's rallied more than 100% from the base-on-base breakout to now.
