Patterns To Market Wealth: Fifth In A Series The next time you see a stock making its third pullback to its 10-week moving average, don't automatically assume that it's extended and pass on it.
Take a closer look at the chart, as the stock could be forming an ascending base.
Cups, cup with handles, flat bases and double bottoms are patterns that you see every day. Ascending bases are patterns that you only see almost once in a blue moon. Yes, they're rare. So when you see one, keep stalking it as the pattern can lead to huge gains.
Apparel retailer Limited Brands (LTD) more than doubled in three months after clearing an ascending base in March 1983.
Specialty alloys maker Titanium Metals (TIE) bolted more than 100% after breaking out in late March of 2006.
The ascending base is tougher to spot because, unlike a flat base or cup with handle, the rarely seen structure has more parts.
An ascending base is typically not a first-stage pattern. It tends to occur after a stock has already broken out from a cup with handle or double-bottom base and climbed at least 20%.
The pattern involves a series of three pullbacks. Each retreat should generally range from 10% to 20%. What's key here is that each pullback creates a higher high and a higher low. That's what gives the structure the ascending, or almost stair-step, look.
Sometimes, each dip will take the stock to its 10-week moving average, but this is not a requirement.
While some rare patterns can be as short at four to five weeks in length, ascending bases typically take nine to 16 weeks to form.
Like other IBD patterns, in order to get the buy point in an ascending base, just add 10 cents to the high of the third pullback.
Wireless gear maker Qualcomm (QCOM) had a monster run in the late 1990s. The stock broke out from a cup-with-handle base in January 1999 (1).
After an already massive run, the stock made a series of pullbacks (2) starting in late July. To some investors, Qualcomm may look like it was extended, but it was just forming what would become a powerful ascending base.
Qualcomm cleared a 226.48 buy point in the week ended Nov. 5 (3) and rocketed 253% before making a sharp pullback of more than 60% by July 2000.