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Lopsided Bases Produce Few Big Winners — So Avoid Them

Symmetry is often associated with beauty — like a flower or a butterfly ... or a nicely formed stock chart.

Symmetrical cup bases, in which the number of down weeks on the left side roughly equals the number of up weeks on the right side, look nice and tend to have the best chance of success. It's even better if the cup is nicely rounded and isn't marred by sharp weekly swings of 10% to 15% or more.

IBD research dating back to 1880 on the biggest stock market winners has shown that wild or lopsided bases have a much lower success rate than correctly formed patterns.

"You want a stock to prove its strength to you before you invest in it," IBD founder and Chairman William O'Neil wrote in ".

A sound chart pattern reveals a clear . The principles of symmetry are also relevant for double-bottom bases. These are essentially W-shaped patterns, though the second bottom must undercut the first.

In contrast, the bars shown below the chart need not be symmetrical. The left side should show a modicum of high-volume weekly declines as weak investors get shaken out. The right side should show a string of gains in above-average volume as new investors come in and propel the stock toward its buy point.

Studying breakouts from various bases will help you distinguish the good from the bad. MercadoLibre (MELI), Latin America's premier online auction site, offers an example of the latter.

The stock formed a base from May through October 2011. But the 48% correction and plethora of wide, sloppy moves were serious flaws. In fact, the base was so sloppy that it couldn't easily be defined. It could be seen as a with or a . In either case, the base was asymmetrical due to the stock's sharp move up from the bottom. (1)

The buy point was 90.09, which MercadoLibre cleared in strong turnover during the week ended Dec. 9, 2011. But it quickly retreated, slicing through its 10-week line and sinking 14% below the buy point, triggering IBD's 8% sell rule. Another past 95.58 in early February 2012 failed to gain much ground, and the stock rolled over again.

At the first breakout, MercadoLibre's earnings-per-share growth was still robust, but clearly slowing down from big increases in 2009 and 2010.