Category: O’Neil Wisdom

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What are Wide and Loose Base Patterns?

When we speak of “wide-and-loose” price structures, we are talking about stocks that show erratic price behavior while forming the base. These stocks will typically have large price fluctuations within each week, and from week to week. Further, they will often have very steep corrections from the former high point to the trough of the base pattern. It is not unusual for wide-and-loose price structures to show declines of 50% to 60% in the cup and handle formation, which is excessive and makes for a base more prone to failure.

 

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Should we Buy Stocks Breaking Out of Bases with High Depth?

The first point to clarify is that “”resetting the base count”” does not
mean you can buy a stock that’s rising out of the bottom of a base.
After a stock goes through a correction, whether major or minor, you
should wait until it breaks out near its old high before considering a
purchase.

In general, you should start recounting bases after a major correction
that is usually the result of a bear market. A quality stock may correct
40%, 50% or 60% over a number of months, thereby clearing the
slate for a new advance once the market improves.
Stocks that collapse 80% to 90% or more, however, may be damaged
beyond repair. You’re probably better off avoiding them.

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What is the Alternative Buy Point in Quality Growth Stocks?

If you miss a good stock when it breaks out, the 50-day moving average offers a second chance. Quality growth stocks with good institutional sponsorship often find support around this line, which tracks a stock’s average price over the prior 50 days. That’s because mutual funds and other big investors may add to their positions when a favored stock pulls back to or just below the 50-day. The first such pullback offers the best opportunity. The more extended a stock gets from its initial breakout, the higher the chance of a sizable correction.

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When Should an Investor Buy a Stock That Pulls Back?

If the stock falls back into the base or falls more than 8% below the pivot (buy) point, you should sell all or at least half the shares you own in that stock. If the stock falls back to the top of its base or pivot point, then you have some scenarios to consider:
1) If the stock pulls back on light volume due to temporary weakness in the general market, you may consider buying the stock at this point.
2) If the stock pulls back on light volume and the general market is strong, you may buy the stock at this point.
3) If the stock pulls back on heavy volume due to weakness in the general market, you should assess the overall market. Many times, when the market experiences just a temporary pullback, healthy stocks can still go higher.
4) If the stock pulls back on heavy volume and the general market is strong, then don’t buy the stock immediately. Wait and see what the stock does over at least the next couple of days.


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Why One Should Not Predict Stock Market?

It is not productive to try to predict where the market will be tomorrow, next week, next month or next year. What you need to know is what the market is doing right now. When the market goes through a weak period, watch for signs of a new rally. Look for at least one of the major market indices to rise 1.5% or more on greater volume than the prior day. This “follow-through” usually happens in the fourth to seventh day of an attempted rally. There are other signs that help you spot a market bottom.