Credit: Shutterstock photoWith the stock market climbing and consolidating every few weeks this year, many stocks have formed base-on-base patterns. Keep an eye out for those, because they tend to be strong chart formations.
The base on base is, of course, a combination of two bases. A stock forms a base but doesn't rise in price much from the buy point. That's often because the general market comes under selling.
So, a new base starts taking shape at a higher elevation than the first. On a chart, the two patterns resemble the profile of two stair steps. Sometimes, the breakout from the second base will come after the selling pressure in the market has lifted.
Here are five characteristics to help identify the pattern.
- The two bases can be of any proper type: cup with handle, flat base, double bottom, cup without handle. Usually, though, the second pattern is a flat base.
- The second base should not encroach much into the price levels of the first. Any base that sinks much into the first base is not a proper base-on-base formation.
- The buy point is determined by the second base, whatever that is.
- When counting bases, a base-on-base formation counts as a single stage. For example, don't count a cup with handle as first stage and a flat base on top of it as a second-stage base.
- If a stock climbs more than 20% from its buy point before it starts forming the second base, consider the two patterns entirely separate, not a base on base.
To illustrate the characteristics, have a look at last year's chart of Advanced Energy Industries ( AEIS ).
In April 2016, it started a shallow consolidation that stretched to May. On May 23, Advanced Energy cleared the 35.89 buy point (1) . Volume was low that day, which suggested that institutional investors could take their time buying shares or pass altogether.
In two weeks after the breakout, the stock rose less than 9%. Then it started forming another shallow consolidation, one that resembled the first. Both declined about 10% and were five weeks long. More important, both were proper patterns. That gave Advanced Energy the framework of a base on base.
The stock topped the 39.13 buy point July 12 (2) . Volume also was low, but weekly volume was 70% greater than the previous week. Shares continued climbing with minor corrections for many months.
( This column originally published in the Aug. 21 edition of IBD Weekly. )
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
