I’m always intrigued by huge bases, typically a prolonged period of contraction leads to a prolonged period of expansion, hence the term; the bigger the base, the higher into space it goes. We’ve pointed out a few bases over the last few years and have done very well with them. These huge bases don’t show up on a regular basis especially after a long-running bull market, but when they do you have stay on top of them because once they emerge from their bases (stage 1 to stage 2), they usually do very well.
Two recent examples that we flagged here on the blog were $PI and $Z (LINK), $PI made a quick 20% move, and $Z is up about 10% since the post which was written on May 18th. Those two stocks are just starting to move in my opinion.
Stan Weinstein, the author of Secrets For Profiting In Bull and Bear Markets, describes the basing area as follow.
The Basing Area: “After XYZ has been declining for several months, it eventually will lose downside momentum and start to trend sideways. What’s actually taking place is that buyers and sellers are starting to move into equilibrium, whereas previously the sellers were far stronger, which is why the stock had plummeted. Volume will usually lessen–dry up–as a base forms. But often volume will start to expand late stage 1, even though prices remain little changed. This is an indication that dumping of the stock by disgruntled owners is no longer driving down the price. The buyers who are moving in to take the stock off their hands are not demanding any significant price concession.”
$PDLI, $ZTO, $COTY, and $WKHS are four stocks that are trying to emerge from long bases.
$PDLI is a BioPharma name that has been trading sideways for 6-months. The buyers have started to get more aggressive recently, you can see the pattern of higher lows, they are no longer waiting to pick up the stock at the bottom of the range. The stock has also tightened up considerably in the last 15 days.
$ZTO is an express delivery company in China. The company recently came public, and it has a very interesting story. The stock has been trading sideways for 6-months, and it’s trying to emerge from this consolidation zone. You can also see a pattern of higher lows as the buyers are starting to get antsy. The company just recently announced a $300 million buyback plan.
$COTY manufactures, markets, and distributes beauty products worldwide. This stock has been trading sideways for 6-months and also has a pattern of higher lows. The most interesting thing about $COTY is that the insiders have been buying up the stock hand over fist. In the last five months, the insiders have picked up 4.3 million shares in the open market at prices ranging from $18.39 to 19.05. There many reasons why insiders sell stocks, but only one reason why they buy them.
Base patterns can be very powerful, the longer, the better, and once they get going they are not easy to stop, a recent example is $SHOP. Shopify broke out of a 6-month pattern and never looked back.