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Look For Bases That Start With An Orderly Decline

In what part of CAN SLIM investing will you find that a hard, high-volume decline is a favorable development for a stock chart? Nowhere. The beginning of a new base is no exception. In fact, that's where you may most want to see an orderly, calm decline to whatever point of support the stock ultimately reveals. Wild price action such as gap-downs and wide price bars indicate the type of institutional selling that results in a long-term decline for the stock.

After all, what is a base? It's a substantial pause in a stock's uptrend.

The whole point of base analysis is to make sure institutions — which command the bulk of stock-trading activity — are still buying the stock. Where are they buying it? At what point do the bulls step up and get aggressive

But if the left side of a base shows a steep, high-volume rush for the exits, it's likely that the very institutions you're hoping will support the stock are instead unloading shares for good. Don't expect any help from them.

When the funds reverse on a stock to sellers from buyers, who's going to stop them? You

Instead of making excuses for a stock with a steep left-side decline, you'd be better served by focusing on stocks that show gentle declines in the beginning weeks of their bases.

Yes, a 30% decline is fine. But if the worst a stock can do is an 18% drop before settling into a nice pattern, you're likely looking at a stock enjoying the accumulation of big funds. Those hands may think an 18% decline is a steal.

SolarWinds (SWI), a maker of software used by frontline tech managers to fix and secure communications networks, showed how to make a nice descent into a cup.

The stock began its base-building effort in the week ended Dec. 16, 2011, by falling a moderate 10%. (1) Volume for the week climbed 4% above its average — not at all the sign of a panic.

And, while that drop proved to be the start of a four-week losing streak, the worst pain was seen in that first week. Losses thereafter diminished.

In total, SolarWinds corrected just 19% in its seven-week base.

The stock broke out Feb. 3, 2012, and climbed more than 40% until it began a new base in May.