A key part of knowing how to invest is knowing how to properly analyze a stock. And base counting is an often underrated but very important chart assessment tool.
As you may know, a base such as a cup-with-handle, double-bottom or flat base will form and give a stock a level to break out from. Once the stock breaks out and travels higher, it may go on to form a series of new bases.
But if a stock undercuts the lows of a prior base, the base count starts over again at one.
So why is this important? Most leading stocks can typically run through two, three or even four stages of bases before showing signs of a classic top. It's important to have a clear picture of where a stock is in its life cycle to truly understand what it is that you're trading.
How To Invest: Using Base Counting In Your Investing
As with all chart analysis tools, the key to using it well is in the nuance. When using the IBD MarketSurge charting tool, you'll see some numbers next to the word "stage" when hovering over a base, such as 1, 2(2).
The first number counts the number of stages. The second number is the number of bases you have during that stage count. If a stock undercuts the low of a prior base, the stage count resets to one. If a stock breaks out from a stage one base, rises 20% or more and then forms another base, this next base is a stage two base. You'd see 2(2) next to the word "stage" on MarketSurge.
Base Counting Example: Spotify Stock
Spotify offers a clear example on how to count bases. From August 2022 through February of 2023, the stock formed a first-stage base after a lengthy downtrend (1).
Then in July 2023, the stock formed a cup with handle base (2).
Shares then broke out and rallied until late April 2024, when the stock formed a series of three flat bases (3). The stock didn't rise 20% in between these bases, so the entire pattern was considered third stage.
Finally, the stock managed to rally more than 20% before forming a cup base in December 2024 (4). This was a fourth-stage base.
Within just a few weeks after that breakout, the stock rallied roughly 25%, before pulling back again to form a double-bottom base (5) — a fifth-stage base.
