Bases

You’ve done your research on a company’s earnings growth, revenue growth, and other key signs of fundamental strength. You’ve verified that the broader stock market is in an uptrend, confirmed by the follow-through day you just learned about in our most recent stock trading lesson.

Now comes the next test: When should you start preparing to buy that stock that you like? The answer is simple. Wait for that stock to form a base.

I. What Is a Base?

A base is a stock chart pattern formed in a period of weeks or months in which a stock consolidates its previous gains, setting up for another uptrend.

Bases come in many different shapes, including cup shapes, saucer shapes, and other shapes (we’ll cover those shapes in more detail in future lessons). Whatever the base’s shape might be, all bases tend to happen for similar reasons. 

II. Why Are Bases Important for Investors?

No stock can go up forever. Eventually, even the most powerful stocks will need to take a break and consolidate its gains before making another run. Thus, learning to identify a base when it’s happening gives you either an opportunity to buy more shares as the stock dips, or if you don’t yet own shares, to buy them when the end of the base (the breakout) occurs.

In short, bases set up the next big move for a great stock. Learning to identify them and capitalize on them will help you learn to time your trades better and make more money as a result.

III. What Are the Different Stages of a Base?

The beginning of a base (also called its left side) starts when a pronounced uptrend for a stock is followed by a bout of selling. That selling typically indicates that institutional investors such as mutual fund managers are taking profits after a big gain, thus creating a downward slope that forms the left side of the base. 

Eventually, the selling will slow down, resulting in the base finding its bottom. Still, it’s tough to know when you’ve hit the bottom of the base, as the stock at this point could either start to turn higher or head even lower.

The right side of the base will form when those heavy-hitter investors start buying shares again. That rush of buying pushes the stock higher, rounding out the base’s shape. Still, this remains a risky time to buy, as the stock needs to prove it can surge past its previous point of resistance, as in the price at which it formerly hit a high before falling into the base. 

Then finally, if the stock’s acting bullishly, you’ll see a big price jump in heavy volume, resulting in the stock clearing the top of the base, surging past that prior point of resistance. That action is called a breakout, a great sign for future success, and another subject we’ll cover in more detail in a future lesson.

Moving on…

So there you have it, our first look at bases. Still, lots of details remain to be learned. Fortunately, the next few lessons will walk through the different kinds of bases, their shapes, and how they work. Click the link below to check out cup-with-handle bases. Not yet ready for that lesson? Stroll through our other educational articles to learn more about using technical analysis to assess the strength of individual stocks.