Forming Bases

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Commentary: After the recent pullback, it has become even more important for traders to focus their attention on stocks that have been able to build sound bases. A base comes from a healthy consolidation, and is often an important prerequisite for a stock emerging into a new sustainable trend. A sound base often takes time to develop, and quick or choppy bases often result in failed moves as there are still many participants from the prior trend anxious to take their profits. Once a stock emerges from a healthy consolidation, the base will usually serve as a strong support or resistance level because that area is filled with other traders who missed the breakout and are anxious to avoid missing a second opportunity.

During a market correction, the strongest stocks will simply continue to consolidate rather than pull back. Stocks that can withstand sustained market weakness often reveal strong institutional support, and take on a leadership role as other stocks wither with the selling pressure. While the general markets are not out of the woods when it comes to the recent weakness, it never hurts for a trader to start building a list of stocks that are emerging from healthy bases.

Bottom Line
While it wouldn’t be prudent to rush into stocks just because they have shown relative strength, if the markets can recover from the recent correction then these would be a good place to look for continued leadership. Stocks that are emerging from a healthy base should be less prone to a failed breakout, as shares have already been exchanging hands prior to the breakout. There shouldn’t be as many traders looking to cash in for a profit, and hold on for bigger gains. Pullbacks theoretically would also be met with either new buyers who feel like they missed the boat, or existing holders adding to positions. The key for traders is to remain patient as the correction runs its course and then be ready to pounce on these stocks that have shown strong institutional support.
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