Some stock chart formations are so rare, when they happen it's something investors cannot ignore. One such case is when a stock soars to new highs straight from the lows of its base.
In most bases, the stock price makes a gradual recovery to new highs. Usually, it takes several weeks or more for the stock to go from its lows to new highs.
A stock that goes from the base's lows to new highs may look bullish. But this type of ultrarapid recovery — in one or two weeks — is a bad sign.
IBD founder William O'Neil called this rare move "straight up from the bottom." He considered it risky because the stock has had no late pullback, such as what you might see in the handle of a base. Instead of investors making steady share purchases or having a final shakeout, the buying happens in a flurry.
Once that occurs, you have to wonder how many more buyers are left to keep the stock climbing. And a sudden burst can tempt some investors to take profits.
A key point: If the surge from the lows falls short of new highs, that's not necessarily bad. Only when the stock hits new highs past a buy point, you have to question the breakout.
MSCI Stock Chart And Its Too-Fast Breakout
You can spot this flaw using weekly charts at Investors.com.
In one of the rare cases, a powerful-looking breakout for MSCI occurred the first week of November 2020. The financial data and index manager had formed a 14-week base (1).
MSCI shares rallied more than 20% as they topped the 398.49 buy point in heavy volume (2). In just five days the stock jumped more than 18%. Volume was heavy, too.
But the very next week, MSCI stock gave back about half the gain and was back below the buy point (3). While there was no sell signal (the drop from the entry was less than 7% or 8%), the stock needed more time. The move straight up from the bottom was the key to reading this breakout.
It formed a lopsided flat base for five weeks (4). That breakout also flopped. MSCI finally got it right with its next base. A 12-week cup with handle saw tight trading in the handle area and a solid breakout in June (5).
This article was originally published Feb. 23, 2023, and has been updated.
