When a stock undercuts the low of a previous base, the count
This is important because a stock breaking out of a first- or
second-stage base has a much better chance of success than those
clearing a later-stage pattern.
In October,Yum Brands (
) shaped a double bottom with handle that undercut the low of a
flat base completed in late June. The action established the
double bottom as a first-stage base.
The middle peak plus 10 cents -- 55.80 in this case -- is
usually the buy point in a double bottom. But the handle offered
a higher buy point at 56.05.
Volume and sometimes market conditions determine which entry
becomes actionable. When Yum cleared the middle peak (before the
handle was formed), the uptrend was under pressure and strong
volume was absent.
When Yum cleared the handle, the market was in a correction
and volume was again inadequate.
At this point, what was left? The left-side high plus 10 cents
-- 57.85 or up to 60.74 with the 5% chase limit -- became a
For a month, Yum danced above and below the buy range without
convincing volume. On Jan. 11, with the market in a confirmed
uptrend and the stock still in the 5% buy zone, Yum broke out in
85% greater volume.
From the maximum allowed buy at 60.74, Yum advanced 23% in a
little more than three months.
Doing nothing is the hardest thing for some investors to do.
Yum worked, but an investor needed to wait for the right
Since late April, Yum has been consolidating. The stock lost
its 50-day line but found support at its 200-day line. The
correction is 16% deep, which is acceptable.
Yum needs to finish shaping a stage-two base. Once again,
doing nothing is the course for now.
Yum's chains include Pizza Hut, KFC and Taco Bell. The annual
dividend yield is 1.8%.
Earnings grew in the 13% to 17% level in the past six
For more on Yum Brands,
see IBD's front-page piece dated April 18 in