After Deep Slide, Some Leaders Form A Bottoming Base
Enviado: 16/7/2003 18:30Investor's Business Daily
After Deep Slide, Some Leaders Form A Bottoming Base
Wednesday July 16, 9:13 am ET
By Jonah Keri
A key IBD mantra defies conventional wisdom: Buy on strength, not on weakness. Seek stocks breaking out of bases and surging to new highs, not beaten-down issues that are dwelling near their lows.
Why? Decades of IBD research show that stocks already showing superior strength are the ones most likely to keep nabbing big gains.
In a new bull market, you should always focus on stocks that are aiming at new, all-time highs. But given the severity of the 2000-02 bear market, the rally's leadership has been a mix of new and old names.
So how should one view a stock that's still well off its peaks but is starting to show strength again? As the long bear bottomed out, so did many former leaders. That action produced a spate of new patterns, or bottoming bases.
A bottoming base occurs after a leading stock falls extremely hard from its summit. After undercutting prior lows, it eventually hits a trough and rallies back up. Finally, it sets up in a new consolidation.
How should you treat this pattern? Start by eyeballing how far the stock sits from its 52-week high. A highflier may peak, then spend years in free fall. But if it makes a sharp turn upward after hitting bottom, it should approach its 52-week high. Its Relative Price Strength Rating should also ramp up.
You can then treat a bottoming base as you would any other base. In a cup-with-handle base, you want to see the handle form at 5% to 15% off the stock's 52-week high.
Some investors may be concerned about overhead supply - longtime holders eager to sell when the stock climbs back up. Remember that once a stock has traded for two or more years after hitting a peak, overhead resistance usually becomes much less of a factor.
As always, you also want to see the stock show growing sales and profits, a strong industry group and solid institutional sponsorship.
SanDisk peaked at 169 in March 2000. The stock then plunged 95% to a new low following 9-11 (Point 1). The maker of flash memory devices marched back up, forming a series of consolidations but remaining in the same range for a year and a half (Point 2). But from December, it traced a smoother pattern that showed accumulation on the base's right side. On May 21, it shot out of its cup-without-handle base (Point 3) en route to a 52-week high and strong gains. Profit and sales had picked up sharply for four straight quarters.
After Deep Slide, Some Leaders Form A Bottoming Base
Wednesday July 16, 9:13 am ET
By Jonah Keri
A key IBD mantra defies conventional wisdom: Buy on strength, not on weakness. Seek stocks breaking out of bases and surging to new highs, not beaten-down issues that are dwelling near their lows.
Why? Decades of IBD research show that stocks already showing superior strength are the ones most likely to keep nabbing big gains.
In a new bull market, you should always focus on stocks that are aiming at new, all-time highs. But given the severity of the 2000-02 bear market, the rally's leadership has been a mix of new and old names.
So how should one view a stock that's still well off its peaks but is starting to show strength again? As the long bear bottomed out, so did many former leaders. That action produced a spate of new patterns, or bottoming bases.
A bottoming base occurs after a leading stock falls extremely hard from its summit. After undercutting prior lows, it eventually hits a trough and rallies back up. Finally, it sets up in a new consolidation.
How should you treat this pattern? Start by eyeballing how far the stock sits from its 52-week high. A highflier may peak, then spend years in free fall. But if it makes a sharp turn upward after hitting bottom, it should approach its 52-week high. Its Relative Price Strength Rating should also ramp up.
You can then treat a bottoming base as you would any other base. In a cup-with-handle base, you want to see the handle form at 5% to 15% off the stock's 52-week high.
Some investors may be concerned about overhead supply - longtime holders eager to sell when the stock climbs back up. Remember that once a stock has traded for two or more years after hitting a peak, overhead resistance usually becomes much less of a factor.
As always, you also want to see the stock show growing sales and profits, a strong industry group and solid institutional sponsorship.
SanDisk peaked at 169 in March 2000. The stock then plunged 95% to a new low following 9-11 (Point 1). The maker of flash memory devices marched back up, forming a series of consolidations but remaining in the same range for a year and a half (Point 2). But from December, it traced a smoother pattern that showed accumulation on the base's right side. On May 21, it shot out of its cup-without-handle base (Point 3) en route to a 52-week high and strong gains. Profit and sales had picked up sharply for four straight quarters.