The base-on-base pattern may not seem common to new readers of IBD, but it is definitely worth knowing and spotting.
It typically consists of a flat base that sits on top of a cup-with-handle, double-bottom or other pattern. The base on base also offers an opportunity to buy a stock just as it goes into an explosive price run.
Oracle (ORCL) built a picture-perfect one.
The software giant formed a flat base on top of a cup-with-handle base as the market trended sideways in September 1999. Flat bases form over at least five weeks and correct no more than 15%. They're often seen when a period of market turmoil puts pressure on even the strongest stocks, causing them to trend mostly sideways.
Flat bases may also show up amid a pullback to the 10-week moving average after a stock has already cleared a prior base.
Oracle cleared a 19.96 cup-with-long-handle buy point (adjusted for a 2-for-1 split in January 2000) in early September 1999, but the stock failed to rise 20% above the entry, a threshold that separates an earlier base from a new, later-stage base.
A base on base counts as one base, with the second base being most important. It's not unusual for the low of the upper base to undercut the buy point of the lower base. But you should sell the stock if it falls 8% below the entry.
Oracle's upper base formed after the stock had risen nearly 18% from the cup-with-handle buy point. The pattern was six weeks long and corrected 15%, meeting the definition of a flat base. Though it undercut the lower base's buy point, it didn't trigger the 8% sell rule.
Oracle cleared the 23.52 flat-base entry on Oct. 29, 1999, and soared to a high of 90 on March 24, 2000, nearly quadrupling in just five months. During its run, the stock often closed high in its weekly trading range, another sign of strength.
Importantly, Oracle's fundamentals remained strong as the base-on-base pattern took shape. It had an Earnings Per Share Rating of 95 and a Relative Price Strength Rating of 92 when it broke out.
Also, Oracle's relative strength line was rising sharply leading up to the breakout. That was a sign that the stock was outperforming the market, putting it in position to take off as the market began to rise.
It's easy to think only weak stocks form base-on-base patterns, since they consolidate so soon after breaking out from the first base. But the structure often produces powerful gains when a new market uptrend begins.
"It's like a spring that is being held down by the pressure of a heavy object," IBD Chairman and founder William J. O'Neil wrote in "How to Make Money in Stocks.
"When the bearish phase in the overall market ends, as it always does, this stock is more apt to be one of the first to emerge at a new high en route to a huge gain," he added.