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Why The Base-On-Base Chart Pattern Etches Superb Stock Gains


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Are two heads really better than one? Does a cat have nine lives? And can a pair of bases by the same stock produce a superb breakout?

[ibd-display-video id=3037819 width=50 float=left autostart=true] People might disagree on the first two questions. But as for the third, the answer is an indisputable yes.

The base-on-base pattern, which strings together two or more separate bases, appears frequently on the stock market landscape. Why?

Sometimes a stock is ready to break out to new highs and does so, but the rally does not achieve a 20% gain because the greater market is taking a break or even going into a correction.

When the market is shaky, stocks have a tougher time going higher. Most stocks follow the market's direction.

So when the stock you have bought correctly and researched thoroughly did not produce the 20% profit that you had hoped for, despair not. Watch for a new base to develop on top of the earlier one. The new base's low can slip into the prior base, but ideally not by much.

Schlumberger ( SLB ), one of the largest drilling and well-development firms in the vast oil and gas industry, created a pair of saucer bases before breaking out and achieving a 25% rally in 2014.

In the week ended Sept. 6, the Houston-based firm moved past an 85.12 entry on a superlong saucer with handle. The base was as long as an airport runway. (See it in its entirety on a weekly or monthly historical chart, as best seen in Marketsmith , IBD's advanced charting and stock screening service.)

Schlumberger's fundamentals were heating up. In the second quarter of 2013, earnings per share rose 14%. Not amazing, but the company showed a long record of steady growth. It also marked the highest increase in four quarters.

The stock rose for seven weeks in a row, up 11.5% to a 52-week high of 94.91 (1) . Meanwhile, the S&P 500 staged four distinct pullbacks of 5% to 7% from May 2013 to February 2014. The declines were light, but they were enough to spark a new price correction in Schlumberger. The decline pushed Schlumberger all the way back to its previous 85.12 entry (2) . In this situation, it's smart to exit the stock even with a tiny gain. A determined investor can always buy shares again.

The time to buy arrived several months later. The stock molded another saucer pattern that could also be seen as a flat base . The base's decline was a miserly 10.5%. Schlumberger's March 24-25 breakout past a new 93.94 handle entry came in big volume. Notice in the above weekly chart that turnover that week heated up vs. the prior week, a good sign that the institutions were heavily buying shares.

On July 1, Schlumberger hit a high of 118.76, up 26% and ripe for a great sell.

Have there been any recent base-on-base breakouts that have made investors money? Sure. Check out Winnebago Industries ( WGO ), one of two big winners from IBD's Building-Mobile/Manufacturing & RV industry group. In June 2017, Winnebago didn't roll ahead by much after it cleared an oddly shaped three-month cup base with a 35.00 buy point. The week ended Dec. 23, 2016, in which shares reached as high as 39.30, looked like an outlier on the weekly chart.

In about six weeks' worth of time, the small-cap company rose just 6% from the 35 proper entry.

But in August, Winnebago formed a solid new five-week flat base that sat atop the deeper, wide and loose first base. Notice how tightly Winnebago traded as it fell no more than 10.9% from head to toe and found buyers during a multiweek test of the 10-week moving average. Volume was as dry as sun-baked dirt during the three down weeks within the base.

In the week ended Sept. 8, Winnebago shifted the stock into higher gear, coasting past a 37.30 buy point (a dime above the base's high of 37.20) during a five-week win streak. Volume ballooned sharply above average in four of those five weeks.

In the IBD Weekly print newspaper for the week of Sept. 4, the stock showed a 93 Composite Rating, a 94 EPS, 91 RS, A for SMR (Sales + Profit Margins + Return on equity) and B for Accumulation/Distribution. Winnebago's Building sector ranked No. 5 out of 33 sectors in IBD's stock research tables. (You can check these ratings for any stock in IBD's database by going to IBD Stock Checkup .)

In December, Winnebago hit as high as 58.65, up 57%.

( Editor's Note: A version of this column first ran in the Aug. 6, 2014, edition of IBD . Follow David Saito-Chung on Twitter at @IBD_DChung for additional commentary on the stock market and growth companies. )

RELATED:

Elements Of A Great Cup With Handle: How This Pattern Produces Big Stock Winners

Elements Of A Great Handle: What To Look For When It Forms

Elements Of A Strong Stock: How To Spot The Shakeout + 3 Pattern

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: SLB , WGO


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