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Avoid Late-Stage Bases, Even The Very Pretty Ones

Don't forget to count those bases! With the market in a correction, you're probably looking for new bases. After all, great stocks build bases during corrections.

But beware the stock that builds too many bases.

Remember, the base represents the steady accumulation of the stock by the big-money funds. These big hands prevent any dips from turning into serious declines. You rely on those hands.

But there's only so much of a stock that a fund can buy. When a stock loses that source of , it may be facing the end of what had been a long run.

This problem can manifest itself as a . Certainly a fourth-stage base is late. Some can fizzle out after a third- or even second-stage base appears.

Often the late-stage base will show a host of problems, including wide and sloppy swings, high-volume declines and more than a few downside reversals.

A stock can restore its base count to zero, and in so doing repair its late-stage status. How? If the stock falls so hard that it undercuts the low of a prior base, the stock resets its base count.

Research In Motion (RIMM), which has been falling for years, showed a classic late-stage base failure when it peaked in 2008. In the mid 2000s, the Blackberry maker was the leader in the smartphone space. Not any more. Profit and sales are slumping. The stock recently hit an eight-year low of 6.22.

Let's count the bases. First, a six-week cup through May 2004. Second, a 10-week cup through the week ended Sept. 17, 2004. Third, a 25-week cup-with-handle through September 2006. 1 (A monthly chart is shown.) This base was part of a much longer, deeper consolidation that could be seen as a first-stage base too. Why? In October 2005, RIM fell as low as 17, 2 undercutting the 17.42 low of the prior base. Nevertheless, RIM continued to make huge gains throughout the long run and form new bases.

A long fourth-stage formed from late 2006 to April 2007. Then an ugly fifth-stage base appeared, a 27-week cup base that ran through early May 2008. 3 That base ran 41% deep and held lots of distribution. Simple eyeballing reveals wide, sloppy action.

RIM broke out and rose 8% — then collapsed.