If you're looking to pinpoint the best time to buy stock market leaders like Reddit, then look no further than the classic cup-without-handle base.
This is a base that traces a "U" shape on its daily or weekly chart. Like other bases, it usually appears after a stock has advanced 20%, 25% or more and needs some time to consolidate.
Many of history's top stocks formed what's known as a cup-with-handle base. In this formation, the stock also forms a U shape but there's a brief contraction as shares approach new highs. This dip — a pullback typically no deeper than 12% and at least a week long — acts as a final shakeout of weak holders. It's called a handle.
In the cup without handle, the stock climbs to new highs without a pause. Often, positive news such as a good earnings report will cause the stock to rally sharply. If the stock price jumps past the prior high, you've got a buy situation.
As usual, make sure the volume on the breakout day is at least 40% above average. That confirms strong institutional demand at a key resistance point on the chart.
Don't treat just any cup-shape formation as a cup base. Proper cup bases must have declines of no more than about 33%. The buy point is determined by finding the prior high.
The pattern must be at least six weeks in length. That's one less week than required for a cup with handle, which is a way of discounting the time it may take for a handle to form. Some cup bases can run months, however, as long as they retain a general U shape.
How To Buy Stocks: Reddit Stock
Reddit offered a good example of the cup base in 2024. From July to October, shares of the social media platform traced a classic 13-week cup base (1). The stock broke out at a 78.08 buy point (2) in active weekly volume, according to IBD MarketSurge pattern recognition.
The base was deeper than normal, at 37% from top to bottom, although new issues often form deeper bases that still lead to productive breakouts, particularly when the company's fundamentals and other traits are outstanding.
Reddit — which went public March 21, 2024 — posted quarterly sales growth of 25%, 48% and 54% before the move to new highs. It was also narrowing quarterly losses and was on track to turn profitable.
Since the Oct. 18 breakout, Reddit stock has surged nearly 145%, hitting new highs this month.
Be sure to follow Scott Lehtonen on X at @IBD_SLehtonen for more on how to buy stocks, the Dow Jones Industrial Average and the stock market today.
