With the stock market turning volatile 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. The stock forms a base but does not rise much in price 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 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.
Read our last week’s article:Distribution Days: How to Track Market Weakness in a Confirmed Uptrend