Friday, February 02, 2007

Counting Bases

I just ripped this off from IBD so I can refer to it later. I am always confused by the base count issue.

As you study the chart (it's best to use a weekly one) isolate all corrections of seven weeks or longer, plus any flat bases of five weeks or more.
How far back do you count?

In most cases, you start counting with the first base once the current bull market started, in March 2003.

Bear markets "reset" the base count on all stocks, wiping the slate clean for new rallies to take root.

Also, don't count bases until the company is producing strong earnings and sales growth, the type that you would demand from your investment candidates.

Baker Hughes, (BHI) for example, didn't become a growth stock until its 87% EPS gain in Q1 of 2004. Thus, its first base was the March-July pattern 1.

Make sure the stock has gone up at least 20% from its last breakout before you count another base. Start from the proper buy point of the last breakout. That's usually 10 cents above a key resistance point, such as the handle in a cup-with-handle base.

Corrections starting before that 20% threshold could simply be normal pullbacks. For example, Baker Hughes climbed 16% from its February 2005 breakout before forming a new correction the next month.

That was a base-on-base pattern — from October '04 to early June '05 2 — that should be considered a single base in your count.

Sometimes, stocks form irregular or improper bases. If they result in a 20% or better advance, include them in your base count.

Bear markets aren't the only way to reset base counts. Another way is when a stock falls so much that it undercuts the prior base.

Baker Hughes' current correction has done that, by sinking below the lows in its February-to-April 2005 consolidation 3.

Sometimes, stocks hit their peak after third-stage bases. That's what may have happened to this oil services provider; the stock is now 21% off its high.

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