It's always good to see a fundamentally and technically healthy stock "act right" after a . It doesn't always happen. But when it does, it's easier to hold a potential big winner.
So, what exactly does "act right" mean
Simply put, it's when a stock holds above a after a breakout. Sometimes, a stock will break out, rally 10% or 15% and then move sideways, holding on to the bulk of its gains. Or a can form, ideally showing a correction of no more than 10% to 15%. Or a three-weeks-tight pattern can take shape where each weekly close is within 1% to 1.5% of the prior week's close.
Another way a stock shows strength after a breakout is with an ascending base pattern. While not a common pattern, it can spark a big gain in a stock.
The pattern tends to take shape during market uptrends. It's not uncommon for market uptrends to go through periods of distribution. While some stocks might fall sharply, a few will surrender only a little bit of ground, push to , and repeat this action.
The ascending base forms after a stock breaks out of an initial base. After that 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%). This is key: The low of each pullback is higher than the preceding one.
The buy point is when the stock breaks out past the high of the third pullback by a dime.
Boeing (BA) formed one in 1954 and went on to double in price. Mobile-home maker Redman Industries etched the pattern in 1968 and rose 500% in 37 weeks.
Retailer L Brands (LTD), formerly known as Limited Brands, formed an ascending base in 1983 when the company was still in the early stages of growth. The stock rose for 10 straight weeks, forming a three-weeks-tight pattern (1) along the way, before settling into an ascending base. (2)
The first pullback was 13%; the next two declines were 17% and 14%. It broke out over a split-adjusted high of 15.19 during the week ended March 25 and doubled in just 15 weeks.
It's not easy to sit tight through a normal pullback, especially during periods of high market volatility. The tendency for many is to lock in quick profits too early. So the next time you see a powerful breakout, put or keep the stock on your watch list. It could be acting just fine and maybe even form an ascending base.
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