How To Invest: The Base-On-Base Is Subtle Strength

Growth investors, learning from experience, tend to lose patience with a stock that breaks out and stalls. Their best trades tend to move higher right away, and the early poor performers tend to be the weeds in the garden. Before digging out the weeds, though, it's worthwhile to ask if the problem is a weak stock or a weak market.
In either case you're not making money, so what's the difference? A weak stock deserves a pass; find a better one that is delivering. But if it's a strong stock in a weak market, you might be looking at the beginnings of a great setup.

In fact, a strong stock in a weak market is the recipe for a base-on-base formation.
"What happens is that a powerful stock breaks out of its base and advances, but is unable to increase a normal 20% to 30% because the general market begins another leg down," William O'Neil wrote in How to Make Money in Stocks. "When the bearish phase in the overall market ends, as it always does at some point, this stock is apt to be one of the first to emerge at a new high en route to a huge gain."
Check the stock's relative strength line. Is it trending higher or lower? Higher, and it's outperforming the market. If lower, it's underperforming. Is the market making lower lows, yet the stock is able to climb and hold higher? Countertrend strength is a trait many emerging leaders show.

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