t really what it seems. Investors need to look deeper to see exactly what type of structure is really in play.
Paying closer scrutiny can give you lower entry points while others are still waiting for the high on the left side to be taken out. Therefore, investors need to know the difference between a base-on-base pattern and a base within a base.
Like its name suggests, a base-on-base formation occurs when a pattern forms on top of a prior pattern. Think of it like a staircase-like pattern.
For example, a base-on-base occurs when a stock breaks out from a base, gains less than 20%, then forms another base. The two price formations are treated as one base. The new buy point in the base-on-base will depend on the type of pattern that formed on top.
Base-on-base patterns often form during periods of market weakness. After a breakout a stock can't muster a big rally due to selling in the general market, so it consolidates and forms a new structure. Once the market improves, the stock is free to move higher, like a compressed spring that's released.
In a base within a base, you need to look at the current pattern in relation to a bigger-picture standpoint. It's a smaller pattern swallowed within a larger one.
A stock can build a base for months or longer. You may dismiss it because it's still quite a ways from the left side of the pattern.
But look at the action in recent weeks and see if there's another base forming inside the bigger one.
The smaller pattern will likely be tighter, which is a good thing to see when you're scouting for bases. It also may give a lower buy point.
Lululemon Athletica (NASDAQ: - ) cleared a 43.47 b
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