A leading stock typically produces a 20% to 30% gain from a proper base breakout. But it’s not a guarantee, especially when the stock market is weak.
A stock may break out of a base but fail to progress due to a negative tone in the market or other reasons. When this happens, shares may trade sideways and form a new base just above the prior base. This stacking of bases is called a base-on-base pattern and is one of the handful of historically bullish chart patterns.
The second base shows the stock is doing some more cleaning out of weak holders and gearing up to rally once fresh investors jump into it.
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How To Buy Stocks: Bases And Buy Points
A true leader will be one of the first stocks to break out once the general market begins a new uptrend. A stock suppressed by a weak market will bolt higher from pent-up demand.
The base-on-base pattern begins with a proper base, such as a cup with handle, cup without handle, flat base or double bottom. The second formation is usually a flat base, as the stock marks time waiting for the market to rebound or other clouds to lift.
The second base should look like a stair-step up and form mostly if not entirely above the first base. The buy point will be determined by the second base.
Both bases are considered to be in the same stage. If the second base forms more than 20% above the prior base, it is considered a separate base and not part of a base-on-base pattern. It becomes a second-, third- or late-stage base, depending on its trading history.
Nvidia Stock Gains 43% After Base-On-Base Breakout
An example of a true market leader that formed this bullish pattern was Nvidia (NVDA) in 2021.
Nvidia ran up for seven straight weeks from May until July 2021. The stock took a break and formed a short cup-with-handle base with a presplit buy point of 207.33 (1). Shares broke out of the base on Aug. 20 in heavy volume (2). But after rising 11%, the stock paused.
That pause went on to become a six-week flat base (3). Most of it formed above the prior base, meeting the requirement for a base-on-base formation.
The stock tapped the 230.43 buy point on Oct. 25 (4), then surged 6.7% the following day. Shares had four straight weeks of gains in heavy volume, indicating institutions were piling into the stock.
Nvidia stock rose around 43% in four weeks from the second base’s breakout.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
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