The stock market has spawned some huge winners since the April 22 follow-through day. And a strong second-quarter earnings season has pushed the major stock indexes back near all-time highs.
But after four downside reversals for the Nasdaq composite from July 31 through Aug. 5, the index could be ready to pause and digest recent gains. For growth investors, that's not such a bad thing because it will allow leading growth stocks to do the exact same thing. Either short consolidations , or full-fledged bases, take shape that often pave the way for fresh breakouts.
One technical pattern seen over and over through decades of research from Investor's Business Daily is the base-on-base pattern. While it's always great to see a current holding break out powerfully from a cup-with-handle base, flat base or double-bottom pattern, not all breakouts are powerful.
If a stock breaks out from a well-formed base, and rallies less than 20% from the buy point, a base-on-base pattern often results. Sometimes, it's a weakening stock market that impedes the breakout. One key characteristic of a base-on-base pattern is that the second base, often a flat base, forms entirely or mostly above the first base. Any base that sinks too much into the first pattern is not a proper base-on-base structure.
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And when it comes to counting bases, a topic addressed in a recent Investor's Corner, the base-on-base structure counts as one base. In other words, don't count the initial base as first stage and the second pattern as second stage.
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Nvidia cleared a classic base on base in January 2024. Check the weekly chart, and it's easy to see the initial breakout came from a double-bottom base during the week ended Nov. 10, 2023, and a flat base quickly formed after that. Nvidia made a stellar gain after clearing the flat base in heavy volume during the week ended Jan. 12, 2024.
Oracle, meanwhile, soared out of a base-on-base pattern in October 1999 and scored a triple-digit percentage gain. IBD's model books of past stock market winners showed Coca-Cola started a major move from a base-on-base pattern in late 1934 when the country was coming out of the Depression.
The accompanying chart highlights eBay's breakout in May of last year. The stock started moving out of a cup base in early March (Point 1). But the gain from a 49.48 buy point only hit 7% before eBay started moving sideways. A flat base eventually took shape after that, and eBay scored a gain of 28% from a 52.93 buy point (Point 2) before settling into a new consolidation.
Follow Ken Shreve on X @IBD_KShreve for more stock market analysis and insight.
