Basing stocks or stock forming bases are stocks taking breathers after running up in price for some time. One of the characteristics of basing stocks is decline in volume activity. When a stock is forming bases, large investors like mutual funds will generally steer clear of the stock. This lowers the activities in the stock and allows the stock to correct or reset before resuming its upside movement. Here are ways to find basing stocks.
Things You'll Need
- Personal computer
- Internet access
Log onto the Internet and go to a stock research website like Stock Charts and Yahoo Finance. Enter the symbol or ticker of the stock into the space provided and look at the provided chart patterns. As stocks trade in the stock market daily, they form different base patterns like cup-with-handle base, flat base, double-bottom base and base-on-a-base pattern.
Read the charts of various stocks and look for stocks showing unusual volume activities on distribution days. Distribution days occur when a stock falls in price but the volume increases. This means more people than usual are selling the stock. Stay clear of these types of stocks.
Look for stocks forming Cup-with-handle base patterns. Investors consider this the most powerful basing pattern a stock can form. Cup-with-handle bases look like cups with handles when viewed from the side. The stocks run up in price, then fall in price over time, eventually moving sideways. Unfortunately, this movement is not steep. The stock moves back up to near the former top before it falls again to form the handle. The stock then bursts out of this basing pattern on heavy volume before making new price heights.
Look for stocks forming flat bases. Flat bases occur when stocks, after running up in price, decide to tread water for some time. The stock’s volume activities dry up and the price of the stock does not move much either way. This forms an almost flat line when looked at sideways. This is a powerful basing pattern if the stock comes off this base on heavy volume.
Look for double-bottom bases in stock charts. This base is not as powerful as flat base or cup-with-handle base because a stock will have to fall twice within a short time to form a double-bottom base. The stock falls, rises then falls again forming a pattern that looks like a "W" when viewed from the side. Look for higher volume as the stock comes off this base.
Search for stocks forming a base-on-a-base pattern. The stock runs up in price for a time, forms a flat base then runs up in price again and forms another flat base on top of the former flat base. This type of base is susceptible to failure because the stock has run up in price twice and investors are looking for opportunities to dump the stock.
Tips & Warnings
- Look at a stock’s volume activities and determine if the stock is moving up (buying) or down (selling) on higher volume. Check the company’s cash flow, earnings for the current quarter as well as the full year, mutual fund activities in the stock, company management, group leader or laggard, and the company’s products or services.
- Investing or trading in stocks is risky. Don’t buy a stock because of its chart pattern alone.
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