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Recent Ascending Bases Point To Need To Adjust Expectations

Ascending bases are rare.

A search of IBD article archives since Jan. 1, 2012, found only 11 ascending bases.

The pattern involves three pullbacks and three advances — each making a higher high and a higher low. Pullbacks are 10% to 20%.

The is the high of the third advance plus 10 cents. The pattern often occurs in choppy markets.

Health care consultant Advisory Board (ABCO) formed an ascending base in the second half of 2011. The stock cleared a split-adjusted 36.44 entry in late November 2011. Advisory Board fell as much as 5% below the entry before finding traction. The stock took about four months to hit the 20% profit-taking level.

GNC Holdings (GNC) jumped past a 36.20 buy point April 23, 2012, but the stock closed under the buy point. After slipping 4% under the entry the next day, the nutritional products retailer gapped up 12%. The stock quickly rose as much as 18% above the entry, but never hit the 20% level. The market began to break down shortly after the .

Standex International (SXI) cleared a 47.44 entry Nov. 1, 2012. The stock rose 10% past the entry, then slid to as low as 6.5% below the buy point. It reached the 20% level in three months.

Beacon Roofing Supply (BECN) cleared a 30.90 entry Oct. 18, 2012. The stock fell 2% to 5% under the entry several times before finding traction. Eventually, Beacon reached the 20% profit level in about four months.

PolyOne (POL) broke out in December but struggled to stay above a 20.40 buy point. The stock dropped 4% below the entry at one point. It took three months to hit the 20% profit level.

CommVault Systems (CVLT) punched past a 70.02 entry Dec. 18. The stock initially struggled, dropping as much as 6% below the buy point. A 20% profit was reached in three months.

So far this year, several ascending bases have emerged.

Ixia (XXIA) appeared to be sketching an ascending base in March of this year. The stock was approaching the 22.60 buy point but fell apart on news April 4 that it would have to restate earnings for 2010-11 and part of 2012. The maker of network monitoring gear shows why buying before a breakout is a bad idea.

Restaurant franchiser and operator Ruth's Hospitality (RUTH) cleared a 12.84 buy point July 9. The thinly traded stock rose 7%, but quickly rolled over, triggering the 8% sell rule July 24.

Carrizo Oil & Gas (CRZO) topped a 32.89 buy point in early August, but strong didn't kick in until Aug. 7. The stock dropped 2.5% below the entry before thrusting to the 20% profit level on Oct. 3.

PowerSecure International (POWR) gapped above a 16.89 entry Aug. 8, but the day's high (up 11%) was as good as it got before failure.

Electronic Arts (EA) delivered a head fake as it worked on an ascending base. The stock drew what looked like the third peak in an ascending base at 28.23, but dropped below the previous low Oct. 8, destroying the pattern.

A few common factors emerge in this limited review. Virtually all the stocks pulled back after the breakout, not too surprising given the ascending base is often born of a choppy market. Gains to 20% required some patience, usually three to four months. Of the four stocks that failed, two failures could've been avoided by not buying before the breakout.