A base is not just a base. It's the tiny details that can make for a pattern that produces a winner vs. one that leads to a dud.
In most cases, being cool, calm and collected is better than being wild and crazy in life. That goes for stock chart patterns as well. For a cup base, what happens on the left side — in other words, the first several weeks of action — has a lot to do with the soundness of the overall structure.
What you don't want to see, for the most part, are big gap downs, wide-range and jagged edges on the base's left side. The presence of these tells you that most of the big money, such as mutual funds and hedge funds, are stampeding for the exits.
Look at it this way: Bruised pieces of fruit are not so enticing. Neither are stocks that professionals are dumping. Instead, focus on issues that don't reek of institutional selling. Seek ones that show calmer, orderly corrections.
If you're looking at one stock that corrected 50% from intraday high to low and another that pulled back 20%, with other factors being equal, pick the latter. Bases showing tighter, steady accumulation tend to be more constructive.
As a stock shapes the left side of its base, it's OK to see some down weeks in above-average turnover. But most of the big should be on weeks when the stock is climbing. Seeing the biggest weekly volume during a down week on the left side of the base is generally not a good thing.
Chinese online media and gaming provider Sohu.com (SOHU) showed some weekly losses in high volume in a cup-with-handle base that started in early 2003. Its was slightly low in the base.
The stock racked up losses in above-average trade in the weeks ended Jan. 31 and Feb. 14. Yet Sohu.com managed to close off its worst levels in both of those weeks. It blew past a 9.73 early and a 10.58 cup entry in late March and skyrocketed nearly 350% by mid-July.
While steel stocks have been out of favor for years, AK Steel (AKS) made a solid run in late 2006. In the week ended Nov. 24, the stock cleared a handle in a seven-month cup-like base.
The base had a number of down weeks in heavy volume. (1) But on the upside, the largest weekly turnover occurred on an up week. (2) The overall pattern didn't show much wild action either. (3) AK Steel more than doubled by May 2007 before settling into a new base.
- Information Technology