Will a stock advance after breaking out? The answer, as always, depends on the stock and the market. It also depends on reading stock charts and recognizing patterns that show where the stock is likely headed.
This is the No. 1 question investors ask themselves. This is because stock picking does not end with breakouts. If the stock is able to hold its gain and make further headway into higher price points, the breakout could lead to a rally. However, if a stock triggers a sell signal after riding above its buy point, its breakout has failed.
There are times when a stock's progress to new highs seems halting. Don't despair. This could be a rare type of bullish chart pattern called an ascending base.
Unlike most other bases in which the stock goes sideways, the ascending base is a series of three pullbacks, each higher than the previous. Specifically, the pullbacks are usually 10%-20%. The three pullbacks in this range normally occur within a period of nine to 16 weeks.
An ascending base can be a strong indication of bullish action that is just around the corner.
How To Identify Ascending Bases In Stock Charts
The ascending base could happen in up or down markets. The pullbacks in the base could be part of a market decline.
A stock with strong fundamental and technical outlook that can rise against a weak market current is bullish. That's why the ascending base tends to be stronger when it forms in a weak market.
Ameriprise Financial created one of these unusual patterns in 2020 and 2021.
The stock chart had already advanced from a flat base when it made its first dip in December 2020 (1). The pullback took the stock 8% off its high, then shares climbed to a new high. The second pullback (2) came in the last two weeks of January and also trimmed the stock by 8%.
Ameriprise made its third pullback in late February and early March with a 9% decline (3). The three pullbacks more or less followed minor declines in the S&P 500. Also note that the stock held above its 50-day moving average during this basing period, a good sign.
The buy point in the ascending base is the highest level. In this case, that value was 233.91.
The financial advisory firm topped the entry March 18, 2021. Just like with any other proper breakout, volume was strong (4). Ameriprise dipped below the entry in the following days, but never hit any sell signals.
Ameriprise climbed 15% before its stock chart started to form a flat base, from which the stock made additional gains.
This article was originally published Sept. 23, 2022, and has been updated.
