This year, real estate information website Zillow (Z)has had a couple of successful breakouts. But last year, Zillow's base failed.
What caused the 2012 pattern to collapse
A breakdown of the chart reveals two critical malfunctions: a lack of accumulation and erratic price behavior.
To spot whether there's accumulation — signs that institutional investors are piling into the stock — an investor just needs to study the price-and-volume action of each week of the base.
A well-built base should have more up weeks in above-average than down weeks in such heavy trade.
Wrong Volume Trend
Zillow's base fell short in that regard. During the 17-week consolidation, the stock closed lower in above-average volume in seven of those weeks. You can tell when volume is above average because the rises above the thin line — the 10-week moving average on a weekly chart — plotted across those bars. By contrast, there were five up weeks in heavy trade.
Several of those weeks occurred in the portion of the base (1), which itself was riddled with problems.
The handle acts as a final before the . Volume should be quiet; it should not be a time when institutions are making major decisions about the stock. But Zillow's handle was abuzz with hyperactive trading for most of those weeks.
The shape of the handle had its own problems, declining 19% from intraday high to low, making it significantly deeper than normal. A proper decline is 8% to 12%. Also, a few weeks in the handle displayed wide and loose price action (2). A good handle should have calm price activity.
Zillow broke out well enough, with ample volume. But about two weeks later, shares came under heavy selling. A week later, the stock broke below its 10-week moving average (3) and Zillow was trading more than 8% below the .
The example shows how even when a base is long enough and deep enough, it's the details in the chart that count the most.
Before Zillow broke out, its most recent EPS were flat after a few quarters of triple-digit gains. Zillow's Composite Rating was a mediocre 75 and the was merely 30.
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