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If The Base Is Too Deep, A Big Loss You May Reap

Perilously deep bases are among the most common of flaws one finds when trolling for stocks. It's also a technical flaw that you should take most seriously.

In a normal uptrending market, a base shouldn't run more than 30% to 33% deep. Such a decline from the highest price in the base would be OK, assuming everything else with the stock is primed. But 35% or more is almost always too much.

After all, what makes a base? First, the left side appears. A stock had been rising but ran into trouble. It falls. The only question that counts now is how far the stock will drop.

And that's where the big funds come in. If the stock is still in their radar sights for purchase, they won't allow it to fall very far.

It's not a matter of protecting their positions by supporting the price, but rather about picking up a bargain before the rest of the market figures it out.

Consider some simple math.

You're looking at a stock that fell from 100 to 60. That's a 40% correction. Now let's say the stock builds a right side with no . The is 100.10.

So what are you buying? A stock that's already climbed 67%. That's right, to recover the ground lost from a 40% drop, a stock must rise a higher percentage because the starting point (the denominator) is lower. That recovery may well have been the stock's entire run.

Look at what happened in 2006 to InfoSonics (IFON), a distributor of wireless telecom products and accessories. The stock had blasted to as high as 23.93 in January of that year (before a 2-for-1 split in June) from a long, . exploded along the way as if Wall Street had just discovered a treasure.

The stock started to fall from that Jan. 13 high. Thus, the right side to a new base had begun.

The downside ran as low as 9.25, making for a decline of 61%. You have to ask, if this stock is so hot, where are the pros

The 4-1/2-month base was completed with a rush the last few weeks, as InfoSonics built a right side with wide, high-volume gains. That's not as great as it sounds. The right side lacks the steady accumulation, tight action and orderliness that you really want to see.

InfoSonics broke out May 26 past the 24.03 buy point. 1 It had already climbed 160% from its low.

InfoSonics was especially treacherous in its failure because at first it succeeded. The stock gained 44% to a high of 34.62 in just six days (weekly chart is shown). Now you have the signal to hold on for eight weeks for really spectacular gains.

But the stock fell like a drunk tightrope walker. 2 It closed below its buy point one day after it notched that high. Would you have gotten out? One hopes so.