V-Shaped Base

Over the past few lessons, we’ve delved into some of the most bullish chart patterns you can find for individual stocks. These patterns, also called bases, have produced some of the biggest winners in stock market history. But there’s one kind of base that spells trouble for a stock, flashing a sell sign instead of a buy sign. That’s the V-shaped base.

I. What Is a V-Shaped Base?

A V-shaped base occurs when a stock rides a strong uptrend, then falls into a correction. Instead of declining in a relatively orderly, rounded fashion (like a cup-with-handle base), the V-shaped base dives almost straight down, forming the left side of that V-shape. The right side of the base forms when the stock immediately shoots higher, forging the right side of the V.

II. Why Is a V-Shaped Base a Sign of Danger for Investors?

When a stock drops in price, you don’t want to see it snap back immediately. By following that pattern, the stock isn’t giving itself the time it needs to shake out uncommitted investors, an event that typically takes the form of the rounded bottom of a cup-with-handle base. 

So when the stock shoots higher to form the right side of the V, it’s at risk of running out of steam. That’s because as the stock approaches new-high territory, those nervous investors who haven’t yet pulled the ripcord will often start to sell. As a result, the stock will often lose its momentum, and come crashing down.

III. When Does a V-Shaped Base Typically Occur?

Even the best stocks will eventually end their reign. When a stock forms and breaks out of multiple bases during a long uptrend, that’s a sign of strength. But by the time a stock reaches, say, a fourth-stage base, its run might soon be over.

It’s at those times that stocks will sometimes form a V-shaped base. When that happens, you now have two warning signs telling you not to buy: The fact that it’s a late-stage base, and the fact that this late-stage base is V-shaped.

IV. What Are the Warning Signs of a V-Shaped Base?

The V-shape itself sends you the clearest warning sign. When a stock falls hard and fast, that’s a sign that big-money institutional investors are selling their shares. Then if the stock shoots higher right away and forms the right side of its V, it’s a sign that the stock hasn’t taken the necessary time to steadily consolidate and shake out the uncertain investors still holding shares. 

Even when a stock manages to break out from a V-shaped base, it rarely gets far before turning lower again.

Moving on…

Our look at the V-shaped base should hopefully encourage you to be discerning when looking at a stock’s price consolidation. You should demand that bases conform to bullish patterns like cups and saucers with handles, double-bottom patterns, or flat-base formations – not V-shaped patterns.

For our next lesson getting into the specifics of breakouts, click below. Otherwise, you can peruse the many educational articles offered on our website, covering all sorts of technical and fundamental analysis tools to help you become a successful investor.