All strong rallies
of growth stocks start from a sound base.
Many a times, these leaders extend multiple rallies yielding powerful returns over years. Although this multi-year growth in stock is often backed by fundamental story encompassing the business model and economic environment changes, but investors should also be aware of the significance of a technical profile chalked out by the stock though the run. Let’s understand the concept of counting bases in rally attempts.
First valid base of any stock will require at least 30% prior uptrend
. The stock may extend some gains and start forming another base. However, the stage count will only increase if the stock rallies at least 20% between the pivot level of last base till the start (left side high) of the second base. If yes, then the second base is called as a “Stage-two” base. This means that the count increases or remains same depending on whether the 20% run was achieved.
Stage Count Reset
After a leader makes multi-stage bases, it often runs out of steam and requires serious consolidation. If during a correction or shakeout, the stock undercuts its recent base’s bottom, the stage count is reset. If the stock goes on to make fresh base from there, it’ll be called as a “Stage-one” base.
Why Base Count is Important?
In order to materialize gains from a leader, investors must keep in mind following tips:
- Most leading stocks lose steam after running through 3 stages of bases. Most institutional investors lock in gains at such levels. Hence, one must be aware of this increased risk while buying after a Stage-four breakout, as they’ll rarely be successful.
- Do not count bases in rally attempts when the stock doesn’t fulfill CANSLIM criterion such as minimum volume, minimum share price, among others.
- Investors should book profits after 20–25% run from the pivot of a second or third stage base, as the stock may enter into a long consolidation after that.
- One may consider re-investing in the stock which has already formed three stages of bases if the stock undergoes much needed consolidation for long enough time or resets its base count and starts forming a fresh base.
Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.