It's one thing top stocks to have a well-shaped base, but the price-and-volume action within the pattern can tell you a lot about its strength, too. If you wish to quickly spot the positive elements of a base, read on.
Let's first run through a number of fine points that make a terrific base stand out. Because these are universal signs of buying, they apply to any type of base.
Watch where the stock closes each week and day. The higher in the price range, the better. This even applies to weeks in which the stock closes with a loss. The fact that shares trimmed losses to close in the upper part of the week's range tells you sellers couldn't hold the upper hand.
So, look for weekly or daily closes near the top of the price range, especially in long price bars. Closes in the bottom portion of the range tell you just the opposite — that sellers had the last word.
Compare up vs. down days and weeks, and see how volume moved. It's best when trading is light on declines and active on price increases. Some heavy selling as a stock begins its base may be normal, though.
For every week in the base, check how much volume there was.
Positive Elements Of A Base: Study The Down Weeks Closely
Note every up week that came in above-average volume, and every down week in similar trading. The up weeks should exceed the down weeks.
In some cases, down weeks in heavy volume have a silver lining, so to speak. If the stock rebounds to close in the upper 60% of the weekly trading range, that can be a positive sign. This is especially true when the stock is forming the left side of its base, and in long price bars.
Price movements should be generally tight, not wide-and-loose action such as excessive price swings.
In Top Stocks, Also Look For Price Tightness
If you see two or more consecutive weeks that close with little price difference, that's considered tight action, even if the week's price range was long.
Price gap-ups in high volume also are bullish. They are evidence of strong demand.
Dick's Sporting Goods formed a double bottom, its first base after going public in late 2002. The total correction was a moderate 31% from head to toe. The base also showed no severe price swings.
At the middle peak (1), the stock closed back-to-back weeks with practically no price change. That's tight, constructive action.
Other Positive Elements In The Bases Of Top Stocks: Dick's Had Plenty
As Dick's formed its two bottoms, each time the stock closed in the upper reaches of the price range (2). High weekly closes in three straight up weeks pointed to strength. In the 10-week double-bottom pattern, two weeks stood out for their active volume (3). The fact that the stock rose those weeks indicated that institutional investors were buying shares.
Meanwhile, volume in at least three of the weeks in which Dick's fell in price was below the 10-week moving average. That indicated a relatively small group of sellers.
Although not visible on the weekly chart, Dick's gapped up in strong volume as it neared the end of the base.
The sporting goods retailer cleared its proper buy point of 22.29 on Feb. 19, 2003. Volume was above average but not overwhelming. Shares closed that day giving back almost all their gain. But volume improved a couple of days later.
Dick's formed a flat base soon afterward (4), cleared it, then soared 80% until it started a new base in August 2003.
A version of this column was first published on March 3, 2009.
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