A late-stage (third or fourth) base can work, but the odds are against it. The primary issue with late-stage bases is that they are much more obvious. And the obvious does not work in the stock market. Normally, a late-stage base is wider and looser than previous bases. The primary issue with a late stage base is that they are much more obvious. And the obvious does not work in the stock market. So, even if a late-stage base is perfect in its shape, it is still riskier than a first-or second-stage base.
We mean 25% to 30% from its prior pivot point. A stock should show strength following a breakout, racking up gains before forming a new base. That kind of action provides a strong precedent for a new base to follow. Just watch out for late-stage bases. A third- or fourth-stage base is more prone to failure than an earlier pattern.
The majority of leading stocks are in leading industries. Studies show 37% of a stock’s price movement is directly tied to the performance of its industry group. Another 12% is due to the strength in its overall sector. Therefore, roughly half of a stock’s move is due to the strength of its respective industry. But note that just because the relative strength of the group is on the low side, does not necessarily mean the group is bad. Sometimes, there are only a few true leaders in a group. If the group happens to be large or it is just beginning a move, the group relative strength rating may be skewed to the low side. This is why it’s important to see other stocks in the same group with high Relative Price Strength Ratings rather than a high rating for the entire group itself.
At least 70% of all trading in the stock market is done by mutual funds, pension funds and other institutional investors. So any time institutions buy or sell a stock, their activity is manifested by increased trading volume. Volume is the best measure of supply and demand and institutional sponsorship. Therefore, it is a reasonable assumption that any time volume is strong, institutions are involved in the trading in a significant way.
A great way to find worthy watch-list choices is to focus on stocks that hold up well during the bear market. While few stocks have broken out and notched new highs without correcting, a decent number have formed sound bases or hovered near a prior pivot point. Screening for stocks with Relative Price Strength Ratings of 80 or higher helps you find these candidates. You also want your stocks to hail from leading groups, so insist on solid Industry Group Relative Strength Ratings. Fundamental strength should also play a vital role. Remember, you’re looking for the very best the market has to offer. That means finding stocks with robust quarterly sales and profit growth 25% or more is a good baseline. Try to screen for stocks with EPS rating of 80 or higher. Insist on strong institutional support in the form of an A or B Accumulation/Distribution Rating and rising fund ownership. It is vitally important to remember that even the best-looking stock will likely fail until the market rights itself and launches a new bull phase.