If a stock makes a nice advance, but it is on less than average volume is that a bad sign that maybe the run is over? This is after a nice breakout and a pullback. Also if a stock breaks out on heavy volume and say does a pullback then resumes again making some gains then say breaks out on heavy volume again, how do you know when the base starts? I know it's not wise to buy into the 4th or 5th base breakouts. I understand the base is supposed to last at least 7 weeks, but I don't understand when to determine when the base starts. (June 30, 2001)
Stocks can move up on below average volume and just keep on going. Most of the time, however, the move can get into trouble. If a stock is heading to a new high but volume is low, that is a topping sign on that run. Think of it this way: a stock is like a rock being pushed up a hill. As the rock goes higher up the hill, those pushing get tired. They may quit or they need help. If no help comes in or they quit, the rock rolls back down the hill. Thus, if no buyers come in, eventually there are no more buyers and the stock will fall. This is really true if a stock is running up near a resistance level. After a strong breakout and then a test of that breakout, the stock can rise back up to the first high after the breakout, but if it does not get a volume surge along the way, it could run into trouble at the previous breakout high. If it surges over that level on strong volume, it is going higher. What I just described is a break to a new high after a test of the breakout. If it does occur on strong volume, this is not a new breakout of a base really, but another entry point after the test as the stock has shown it has a lot of buyers at this level. You can buy as the stock moves up off of support on higher volume after a test, or you can buy as it breaks over the high in the breakout run if it occurs on a volume surge.
When we talk about the number of bases, we are talking about full-blown bases that last at least 7 weeks. In some stocks it takes years before they base 4 or 5 times, running higher 100% or more, then forming a base where it corrects 30% or so, and then breaking out of that base. These bases can last 7 weeks, 2 months, 4 months, etc. depending upon the market. One pattern we are seeing a lot right now and one that we like a lot because it usually is setting up for a strong move ahead is the combination base such as the cup with handle followed by a flat base or an ascending wedge. EBAY did this as did RCII, ELON, BBY (it is overcoming that convertible offering, but doing well as it does), and FISV. What happened was the market started to improve coming out of April and into May, and stocks were breaking out. Then the correction occurred and the stocks pulled back, but held above their previous bases for the most part. They would not knuckle under, however, and now they are starting to spring higher. We love these patterns because they usually lead to big gains. NVDA is trying to do the same now, but its ascending wedge has turned into a pennant. Not as bullish, but we love the tight range on low volume over the last few sessions - - crouching for the move higher we believe.
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