Ticker&TapeThe base on base
Sometimes a stock breaks out, the market turns down, and the stock simply builds a new base right on top of the old one. That base on base is often a sign of a strong stock waiting for the market.
How it forms
The stock completes a first base and breaks out, or gets close to breaking out. Then the general market starts to correct. Instead of advancing 20% or more, the stock stalls a little above or near its old pivot and moves sideways.
Rather than falling back into the middle of the first base, it holds near the top. Over the next few weeks it forms a second, usually shallow base, often a flat base, sitting on top of the first.
Why it can be a sign of strength
When the market corrects, most stocks give back their gains. A stock that holds its ground near the highs is being supported by large buyers. Once the market recovers, that stock has already done its resting and is ready to move.
The pattern is like a coiled spring: two layers of consolidation, each absorbing supply. When the second base breaks out, the advance can be strong. Compare the stock with the indexes during the second base. If the Nasdaq fell 10% and the stock held within 8%, that is relative strength.
What to look for
A good base on base usually shows these signs:
- A first base that was valid on its own: prior uptrend, proper length and depth.
- A market correction that started around the time of the first breakout.
- A second base that holds near the top of the first one and does not fall deep into it.
- Tight weekly closes and volume drying up in the second base.
- A RS line that holds near its highs while the market falls.
Where to buy
The pivot is the high of the upper base plus $0.10. Buy as the stock clears it on volume at least 40% to 50% above average, within 5% of the pivot, ideally once the market is back in a confirmed uptrend.
On Ticker&Tape the base outline and pivot are drawn for the current, upper base. Its label depends on depth, usually a flat base or a cup with handle. Look back on the weekly chart to see the first base below it.
Counting bases on base
Because the stock barely advanced between the two bases, many traders count a base on base as part of the same stage, rather than adding a new one to the base count. Either way, it often comes early in a move, which is when bases work best.
Common mistakes
- Confusing a base on base with a failed breakout that fell back deep into the first base.
- Buying the breakout of the upper base while the market is still in a correction.
- Missing the setup by looking only at the daily chart.
Key points
- A base on base is a new base built on top of a prior one while the market corrects.
- Holding near the highs during a market drop shows strength.
- The pivot is the high of the upper base plus $0.10.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. How does a base on base form?
Instead of advancing 20% or more, the stock stalls near its old pivot during a market correction and builds a new, usually shallow base on top.
2. During the second base the Nasdaq fell 10%, while the stock held within 8%. What does that show?
When most stocks give back gains in a correction, one that holds its ground near the highs is being supported.
3. Where is the pivot of a base on base?
You buy as the stock clears the high of the current, upper base on strong volume, within 5% of the pivot.
Check market direction → Try it on Ticker&Tape