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Late-Stage Bases Can Spell Big Trouble

By Donald H. Gold, INVESTOR'S BUSINESS DAILY Posted 12/22/2010 07:18 PM ET

A base is like a mattress. The young ones have good bounce and spring. But an old mattress sometimes can fall beneath your weight.

IBD Exclusive Series: Key Flaws in Bases 1 2 3 4 5 6

If you can learn to count bases, you will be able to avoid a big problem. The late-stage base is like that old mattress. You don't want to be lying on it when it finally gives in. A late-stage base could be the fourth or even fifth base that appears on the chart. Even a third-stage base can be pushing the envelope. At that point, your stock's uptrend may be getting old.
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Counting bases is crucial. Even good stocks can peter out after just two.

In this first column in a series on common flaws in bases, you'll learn how to avoid the late-stage base trap. Which stocks can make a fourth-stage base? Often, the very best in terms of profit and sales growth, institutional sponsorship and the quality of their products or services. They're the market's longtime leaders. But you can become complacent. That's often the prelude to a nasty surprise. After all the hard work you've done, sifting for the stock and tracking its price for the moment it breaks out, what a shame it would be to miss this one flaw. There isn't that much difficulty in counting bases. How do you do it? For starters, you needn't go back any farther than the end of the most recent bear market. At that point, as the new bull emerges, all base counts reset to zero. Everything is fresh and new. When a stock has broken out, look for a minimum 20% rally from the proper buy point before looking for a second base to emerge. A baseon-base pattern counts as a single base, because the upper base forms before a stock has advanced 20%. IBD research has discovered a second way a stock can reset its base count in the midst of a long-term market uptrend. A failed breakout which undercuts that base's lowest point achieves a base-count reset. Consider a longtime market favorite, robots-in-the-operating-room pioneer Intuitive Surgical (ISRG). Count the bases: A cup-with-high-handle appears in February-July 2004 1 (please view a historical weekly chart); a cup-with-handle in AprilJuly 2005 2; a double bottom in August-October 2005 3; and a vast cup-with-handle from February 2006 through March 2007. 4 That last pattern, the most dramatic, can't be said to have been a failure. The stock tripled from its 118.07 buy point. Now look at the action from December 2007 through April 2008. Intuitive Surgical formed a five-month cup with handle. 5 It broke out in April,

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6/5/2013

Late-Stage Bases Can Spell Big Trouble - Investors.com

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reversed lower 6 and ultimately fell apart. The huge decline reset the base count.
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http://news.investors.com/print/investors-corner/557587-late-stage-bases-can-spell-big-trou...

6/5/2013