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When Market Gets Hit Hard, Start Looking For New Leaders

There's almost always a bright side to every story.

When the market pulls back into a correction or goes into an outright crash, investors usually shy away from equities.

But don't just sit idly and wait for the storm to clear. Instead, investors should be using that time to explore charts and find the next round of leaders.

A market correction is usually when most of the best bases and price patterns are made. It's important to always be ready for a new market uptrend, which could be just around the corner.

If you scramble to buy just any name last minute, you might wind up with something other than the true market leader.

After a bear market or intermediate correction, don't expect to find a lot of pretty bases. Chances are that the landscape will be littered with chart patterns that investors will usually avoid.

While most of these bases will look like damaged goods, with wide and loose price action and corrections that run miles deep, some bases will eventually show tighter action and shallower drops — often by the same stock. They can become the launching pad for big winners.

Growth stocks are generally more volatile than the general market. When they get hit, they usually take a lot more heat; it's common for leading stocks to correct 1-1/2 to 2-1/2 times the market. So if the S&P 500 slides 10%, a leading stock could tumble 15% to 25% from its high or more.

In a total market washout, expect deeper bases to form. Bases might not finish near 52-week highs. Investors will likely encounter stocks that correct 40% or more from their peaks. And handles in such stocks are often deeper than 8% to 12%.

During the bear market of a few years back, the Nasdaq plunged 56% from its late October 2007 peak to its March 2009 low.

Cree (CREE), which specializes in LED chips, corrected 57% from its September 2008 high to its December low. The stock then went on to form a low and deep , giving a at 22.49.

Cree cleared the in heavy trading March 18, 2009 — six days after the market's follow-through. The best stocks usually come out soon after a new uptrend gets ushered in.

In spite of the ugly pattern, the stock ramped up 41% before consolidating into a tight seven-week double-bottom pattern with a 30.95 1. The stock rallied 26% from the double-bottom before settling into what became a 2.