No one wants their breakout to fail. When you buy a stock, you want it to take off and bring you along for the ride. However, we know things are rarely quite that simple.
Your stock may fall victim to weakness in the overall market and stop its breakout short of the usual 20% profit goal. But before you write off a trade completely, continue to monitor your stock in the coming weeks. A second buy point could be right around the corner, if you interpret the stock chart correctly.
When a stock goes sideways for weeks after a breakout, it could be forming a base-on-base pattern. This the combination of any two bases. This occurs when a stock forms a base but does not rise in price much from the buy point.
Stair-Step Chart Pattern
Instead, a second base takes shape above the first, usually as a flat base. While this may seem like unattractive move, the formation of the second base is typically the result of selling pressure in the overall market. Rather than getting dragged out with the tide, your stock holds firm and consolidates. Overall, that stepladder action is considered bullish.
There is a "goldilocks" quality to the base on base chart pattern. The second base needs to form above the first, but not too high and not too low.
The low can slip into the prior base but you do not want your bases to overlap.
If your stock does climb 20% past the buy point before forming the next base, that following base is counted separately and not a part of the base-on-base chart pattern. Remember, with a higher base count comes a greater chance for breakouts to fail.
Old Dominion's Base On Base
Old Dominion Freight Line, a provider of motor carrier services across the U.S., reached an all-time high in May of 2021 before pulling back into a cup base (1). The mid-August breakout came with light volume, only producing 10% gains in four weeks before it began consolidating again.
A five-week flat base (2) formed entirely above the prior base with support at the 10-week moving average. When you compare that to the Nasdaq composite, which spent most of those five weeks below its own 10-week line, Old Dominion was poised to strike.
The week ended Oct. 15, Old Dominion completed the second half of the base-on-base chart pattern. Shares broke out above the 304.32 buy point as the relative strength line made new highs. Over the next eight weeks, it topped at 373.58 (3), delivering upward of 22% in profits to investors.
This article was originally published Sept. 21, 2023, and has been updated.
