William O'Neil India
All strong rallies of growth stocks start from a sound base. Many a time, these leaders extend over multiple rallies, which yield powerful returns over the years.
Although this multi-year growth in stock is often backed by a fundamental story encompassing the business model as well as economic and environmental changes.
But investors should also be aware of the significance of a technical profile chalked out by the stock though the run.
Let’s understand different terminologies about multi-stage basis.
Multi-Stage Bases: First valid base of any stock will require at least a 30 percent prior uptrend. The stock may extend some gains and start forming another base.
However, the stage count will only increase if the stock rallies at least 20 percent between the pivot level of the last base till the start (left side high) of the second base. If yes, then the second base is called as a “Stage-two” base and the count increases or remains same depending on whether the 20 percent run was achieved.
Stage Count Reset: After a leader makes multi-stage bases, it often runs out of steam and requires serious consolidation. If during a correction or shakeout, the stock undercuts its recent base’s bottom, the stage count is reset. If the stock goes on to make fresh base from there, it’ll be called as a “Stage-one” base.
Why Base Count is Important?
In order to materialize gains from a leader, investors must keep in mind following tips:
Most leading stocks lose steam after running through 3 stages of bases. Most institutional investors lock in gains at such levels. Hence, one must be aware of this increased risk while buying after a Stage-four breakout, as they’ll rarely be successful.
Do not count bases when the stock doesn’t fulfill CANSLIM criterion such as minimum volume, minimum share price, among others.
Investors should book profits after 20–25 percent run from the pivot of a second or third stage base, as the stock may enter into a long consolidation after that.
One may consider re-investing in the stock which has already formed three stages of bases, if the stock undergoes much needed consolidation for long enough time or resets its base count and starts forming a fresh base.
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