Have you ever bought a stock after it broke out of a strong pattern, only to feel disappointed because it stopped rising early? Don't lose hope, as you may have a golden opportunity called "Base-on-Base"! This pattern is one of the secrets of professional traders to enter strong trades. Let's get to know it.
🤔 What is "Base-on-Base"?
"Base-on-Base" is a strong trading pattern that occurs when a stock fails to achieve the expected rise (usually 20-25%) after breaking out from a previous base or pattern (like Cup with Handle or Double Bottom). Instead of continuing to rise or collapsing, the stock enters a period of retreat and sideways stagnation to form a new base directly above the old base.
💡 Main Idea: This pattern is not a failure; rather, it is a regrouping and preparation for a strong new launch, and the second base is often of the flat base type.
📈 Simplified Illustration of Stock Movement:
1. First Base: The stock forms an initial pattern (Cup with Handle) and breaks out from it at $100.
2. Incomplete Rise: The stock rises less than 20% (reaching only $115 instead of $120-125).
3. Consolidation (Second Base): Instead of a deep correction, the stock trades sideways to form a new base above the $115 level.
4. Breakout: The stock breaks above the highest point of its second base (at $115.10) to embark on a strong upward journey.
⚙️ Basic Conditions for Base-on-Base Pattern
For a stock's movement to be considered a valid "Base-on-Base" pattern, it must meet the following two conditions:
1. Insufficient Rise: The new base must begin to form before the stock achieves a 20% rise from the ideal buy point in the previous pattern. If it rises more than 20% and then forms a base, it is considered a traditional new base and not a "Base-on-Base".
2. Pattern-Approved Buy Point: The ideal buy point is not determined from the first base, but from the shape of the second base itself:
· If the second base is flat: The buy point is 10 cents above the highest price the stock reached during the formation of that flat base.
· If the second base is a "Cup with Handle": The buy point is 10 cents above the handle line of that base.
Important Note: All other standard criteria for bases (such as volume, depth of correction, etc.) should be applied to the second base to ensure its validity.
📋 Quick Summary: Base-on-Base
Element Explanation
Name 🏷️ Base-on-Base
Reason 🤷 The stock failed to achieve a 20-25% rise after breaking out from an initial pattern.
Signal 💡 Forming a new base (often flat) is a new buying opportunity.
Basic Condition ⚠️ The formation of the second base begins before a 20% rise from the previous point.
Buy Point 🎯 Completely depends on the type and shape of the second base.
🎯 Practical Example
Let's assume that the stock of "Abjad" has done the following:
· Step 1: Broke out from a "Cup with Handle" and we bought it at $100 (the ideal buy point for the first pattern).
· Step 2: The stock rose to $112 only (which is only a 12% rise, less than 20%).
· Step 3: It stopped rising and started trading sideways for 5 weeks around the $112 level, forming a flat base with a highest price of $115.
· Step 4 (Entry Point): The new ideal buy point became $115.10 (10 cents above the highest level in the flat base). If the stock breaks this level with higher than average volume, it is a strong buy signal.
🧠 General Summary
The "Base-on-Base" pattern is a testament to the underlying strength of demand for the stock. Instead of collapsing after failing to rise, it significantly refuses to drop and gathers itself for a stronger upward attempt. It gives investors a second chance to enter a strong stock they might have missed in its first attempt, often at an attractive price level before its big launch.
#Trading #Technical_Analysis #Stock_Patterns #Base_on_Base #BaseOnBase #Investment 📈💹
