You often mention a stock basing (i.e., building a base) or a stock consolidating (i.e., laterally). What is the difference in the two, if any?

When a stock builds a base, that is a longer term process that usually takes place over weeks to months and can take many forms, e.g., cup with handle, saucer, flat, double bottom. This occurs when the stock takes a serious correction from a high (in the 20% or more range). Now even some stocks can take a 30% or more correction and still be in a bull run after a properly formed base—it just depends on how far the stock has moved up as to how far it can correct back and still be in an uptrend. In any event, a stock in a base has corrected off of its high and has not bounced right back up off of some support level.

When we refer to a stock that is consolidating, we use that term as more of a short term phenomenon. This usually occurs when a stock has made a nice move and then pulls back to a support level (10 day moving average, up trendline, horizontal support line) on lower volume as some investors take profit. These are usually shorter moves as the profit takers get out fairly quickly (a few days, a week). Then supply and demand takes over and the stock starts to move up again on the next leg. This usually occurs when a stock is still trending up. A base is different in that the stock has usually broken its uptrend and needs to work out all of the sellers that bought at the peak and who are all too eager to sell when the stock shows some upward movement. That is called overhead supply, and it kills early rally attempts (much as the Nasdaq’s early attempts at rallying out of this correction have failed). It takes longer for a stock or an average to weed out that overhead supply to the point that demand is greater than supply and a sustained move up can start.