Leading stocks show strength in several different ways.
They break out of well-formed bases in heavy . They show tight weekly closes after a . They get consistent support at their 10-week moving average during long advances.
Another way a stock shows strength is by forming a base-on-base structure. If you want to find great market winners, keep an eye out for this special chart pattern.
The pattern forms after a stock breaks out of base. But instead of going on a lengthy uptrend, it rallies for a bit — typically less than 20% from the base's recent entry point — then settles into another base. You'll often see a form atop a first base, but a cup could emerge on top of a prior cup. A base-on-base pattern counts as one base.
Examples abound throughout market history. Coca-Cola (KO) did it coming out of the Depression in 1934, and Boeing (BA) did it in 1978.
Base-on-base patterns don't form any old time. They tend to form when selling pressure starts to build in the broad market. When the market takes a turn for the better, historical precedent shows that base-on-base patterns can deliver the strongest upside moves.
That was the case with Ascend Communications soon after it went public in May 1994. It cleared a second-stage base-on-base pattern in December 1994. Its first base didn't look all that great due to wide-and-loose price action. Still, the stock managed to break out and rally 26% in three weeks. Because the bullish move triggered IBD's eight-week hold rule, those who bought at the initial breakout could sit tight as the second base formed.
The second base looked much better than the first, mostly because of tighter, more orderly trade from week to week. The second base formed above the first, just what you want to see, and the base showed some tight weekly closes at the bottom of the base, near the 10-week moving average. Even better, weekly volume in the second breakout (1) was much stronger than the first.
Ascend Communications was also showing strength in a relative way. It started building the right side of its base-on-base pattern when the Nasdaq was still in the throes of a pullback. Ascend was going up while the market was going down.
The Nasdaq eventually bottomed and followed through in December, right at the time Ascend was breaking out past a 35.60 entry. The Nasdaq continued to gain traction and followed suit with a breakout of its own to in February 2005. By that time, Ascend Communications had already rallied 67% past the .