Reading Stock Charts: How to Count Bases And Why You Should?

Over the last couple of months, we discussed about identifying a correct buy point using common chart pattern/base formation such as cup-with-handle, double bottom, and flat base. Along with the type of base, it is important to understand the stages of base.

Stages begin at one and increase with each subsequent base pattern formed. The magnitude of the move between two base patterns will determine whether the stage moves numerically or alphabetically. If the price move from the pivot point of the prior base to the left side high of the current base is 20% or more, the stage will increase by a factor of 1—for example, from Stage 1 to Stage 2.

If the price move is less than 20%, the stage will increase by an alphabetic factor—Stage 1a to Stage 1b.

The base stage and count are always reset to 1 once an intraday low price undercuts the low of a previous base.

The current leaders in the market have formed both early- and late-stage bases. Base stages help investors identify the progress a stock has made in its price advance, the biggest clue to a stock’s remaining growth potential.

It is a good idea to track the number of bases a stock has formed during its current run-up. As a rule of thumb, try to buy stocks that are breaking out of the first or second base of their run. Late-stage bases are riskier. Late-stage means a base that is number three or higher in the base count.

After forming a fourth base, most growth stocks can’t rally much further, if at all. What usually follows is a long, steep slide. After a stock has had a large advance without a major correction, the probabilities are greater that institutional investors will cash in their profits and push the price into a serious decline.

By the time a stock forms a late-stage base, it is usually widely known to investors and running short on fresh buyers. In addition, the late-stage base tends to have unsteady price swings, bouts of strong selling, or other flaws. It is the chart’s way of telling you that the best buying opportunities are gone.

Late-stage patterns can work and sometimes do lead to nice gains, but you should understand that they involve more risk. If you buy a stock on a late-stage breakout, be sure to cut your losses quickly if the stock fails to gain traction and begins to head south.

Related:Cup-with-handle base

Double Bottom Base

Flat base

Read our last week’s article on:Breakouts: Key to Materialize Gains

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

Stock Market Update: Alembic Pharma Surges After Good Q4 Results

Today’s Action

Nifty, +1.4%; Sensex, +1.5%; Nifty Midcap, +1.3%; Nifty Smallcap, +1.7%; Model Portfolio, -1.4%

Market Pulse: Confirmed Uptrend

Today’s session was highly volatile due to the expiry of weekly options contracts. 54% of Nifty50 stocks advanced today, led by Kotak Mahindra Bank(Nse) (+8.3%) and Tata Consultancy Svs. (+5.5%). Kotak Mahindra Bank(Nse) surged as the board approved fundraising plan yesterday. On the flip side, Titan Industries (Nse) (-5.6%) and Hindustan Unilever (-2.6%) were the major decliners.

Barring Nifty FMCG (-1.4%) and PSU Bank (-0.4%), all the sectoral indices closed higher. Nifty IT (+4.4%) and Pvt Bank (+3.2%) were the major advancers. Of 2,112 stocks traded, 1,151 advanced, 638 declined, and the remaining traded flat.

We continue to be very selective about taking any fresh positions. It is important that investors don’t play all their cards at once. We would suggest adopting an investment approach where you begin with a small allocation and increase it as and when the market advances further.

Without trying to predict and decode stories, we will take what the market gives us and continue to monitor unfolding conditions. Stocks with higher relative strength and superior fundamentals can do well. Some leading stocks have sharply corrected. Wait for them to put in at least a short period of consolidation and show a constructive breakout from that range. Buying without this period of constructive behavior into a straight upmove off the bottom, puts you at a risk of drawdown.

Key News

Parag Milk Foods: The company repaid Rs 54 crore to Kotak Mahindra Bank and released its pledged shares with the bank. Remaining Rs 10 crore debt will be repaid on time according to the company. The stock locked in upper circuit of 10%.

Alembic Pharmaceuticals The company reported its March quarter results. Revenue increased 30% y/y to Rs 1,206 crore. PAT surged 65% to Rs 204 crore. The stock advanced 9.6%.

Vodafone Idea: Shares climbed over 10% as the company received accelerated payments under ‘contingent liability mechanism’ from Vodafone Group which was due in September.

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Nifty escapes Distributions; ends below 9000

Today’s Action

Nifty, -3.0%; Sensex, -3.2%; Nifty Midcap, -3.1%; Nifty Smallcap, -3.8%; Model Portfolio, 0%

Market Pulse Confirmed Uptrend

Indian markets reacted sharply to the global cues after prices of WTI crude crashed and landed in negative territory for a while. Nifty gapped down around 250 points and traded sideways in the first half of the day’s session. Post noon, it was a cup-shaped trading session as buyers outweighed sellers. 84% of Nifty50 stocks declined today, led by Indusind Bank (Nse) (-12.3%) and Bajaj Finance (-9.1%). On the flip side, Dr Reddys Labs. (Nse) (+4.4%) and Bharti Infratel (+2.3%) were the major advancers. 

Nifty escaped distribution as today’s volume was slightly lower than that of the previous session.

Barring Nifty Pharma (+2.5%), all the sectoral indices closed lower. Nifty Pvt Bank (-5.9%), Bank (-5.4%), and Nifty Auto (-5.3%) were the major decliners. Nifty Metal and Media indices closed more than 5% lower. Of 2,115 stocks traded, 495 advanced, 1,311 declined, and the remaining traded flat.

We continue to be very selective about taking any fresh positions. It is important that investors don’t play all their cards at once. We would suggest adopting an investment approach where you begin with a small allocation and increase it as and when the market advances further.

Without trying to predict and decode stories, we will take what the market gives us and continue to monitor unfolding conditions. Stocks with higher relative strength and superior fundamentals can do well. Some leading stocks have sharply corrected. Wait for them to put in at least a short period of consolidation and show a constructive breakout from that range. Buying without this period of constructive behavior into a straight upmove off the bottom, puts you at a risk of drawdown.

Key News

Icici Bank The stock declined sharply after reports of $100M exposure to Ocean Tankers, a unit of Singapore oil-trading firm Hin Leong Trading.

Morepen Laboratories: Its shares hit an upper circuit after the company received license to manufacture Hydroxychloroquine from Himachal Pradesh State Drug Controller.

IT stocks came under pressure as the U.S. President tweeted about plans of temporary suspension of immigration.

Aurobindo Pharma The USFDA classified its unit IV of Hyderabad as voluntary action indicated (VAI).

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Stock Market Update: Nifty succumbed to profit booking & ended flat

Today’s Action

Nifty, -0.1%; Sensex, +0.2%; Nifty Midcap, +0.5%; Nifty Smallcap, +0.4%; Model Portfolio, -1.4%

Market Pulse Confirmed Uptrend

After opening more than 100 points higher, Nifty succumbed to profit booking and ended flat. It was a highly volatile trading session. Only 28% of Nifty50 stocks advanced today, led by Tata Motors (+4.7%) and Sun Pharm.Industries (+3.6%). On the flip side, Hindalco Industries (-6.2%) and Jsw Steel (-5.5%) were the major decliners.

On the sectoral front, it was a mixed reaction. Nifty PSU Bank (+4.2%) and IT (+1.6%) were the major advancers. On the other side, Nifty Metal (-3.3%) and FMCG (-2.1%) were the major decliners. Of 2,125 stocks traded, 1,150 advanced, 683 declined, and the remaining traded flat.

We continue to be very selective about taking any fresh positions. It is important that investors don’t play all their cards at once. We would suggest adopting an investment approach where you begin with a small allocation and increase it as and when the market advances further.

Without trying to predict and decode stories, we will take what the market gives us and continue to monitor unfolding conditions. Stocks with higher relative strength and superior fundamentals can do well. Some leading stocks have sharply corrected. Wait for them to put in at least a short period of consolidation and show a constructive breakout from that range. Buying without this period of constructive behavior into a straight upmove off the bottom, puts you at a risk of drawdown.

Key News

DGCA has ordered airlines not to take bookings from May 4 as the final decision is awaited. Shares of Interglobe Aviation (-6%) and Spicejet (-1.7%) have declined sharply.

Fitch has downgraded India’s economic growth forecast for FY21 to 1.8% from 4.6% previously.

Wockhardt received the Qualified Infectious Disease Product (QIDP) designation for its novel antibiotic WCK 6777 from the USFDA.

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Technical analysis: Breakouts, A Key To Materialize Gains

Even when the market is in a Confirmed Uptrend, it is important to initiate your positions at the proper time in stock. A breakout from a base pattern is considered an ideal time to buy a stock. When markets are correcting, three out of four stocks feel the pressure. Even fundamentally strong stocks with good financial strength and growth story fail to deliver results expected of them. So, even when the market seems to be reviving, one feels inhibited to actively take positions in individual stocks. Before the situation becomes clear, all good stocks would have already rallied and what’s left is a lost opportunity.

How does one cope and find a reliable and profitable way out of this randomness? Thanks to technical analysis and historical research, there are tools that can bring some method to this madness and be beneficial.

What is a breakout?

A breakout is the key to realize your reward that you earned through patience and extensive stock selection. Almost all rallies in stocks are preceded by strong and clear breakouts. When you have selected a stock with a convincing growth story but are confused about when to make an entry so as to make profits with minimum risk, that’s when you observe the price chart closely. When a credible breakout is observed, it’s the perfect time to put your money in the stock.

A breakout is a phenomenon that a stock exhibits after making a sound base pattern (any of the five bases), indicating that it’s ready for a rally. There’s a set pivot price which is dependent on the shape and form of the base pattern (like cup-with-handle, saucer-with-handle, flat base, etc.). When the stock crosses and ends above that pivot price, it’s said to have broken out and is set for further upside.

Example

Here’s an example of a successful breakout. Coromandel International formed a cup-with-handle base, as visible on the daily chart. The stock broke out of its pivot price on strong volume and progressed well. Subsequent to the breakout, the stock gave more than 20% return in seven weeks.

Breakouts-TechnicalAnalysis-Stocks

Signs of a good breakout

  1. The base pattern of the chart from which the stock is breaking out from should be convincing with its shape, depth, and price-volume action along its formation.
  2. Ideally, a good breakout is supported by strong volume, and is typically 40% higher than 50-day average volume. Strong volume indicates credible participation from institutional investors. Therefore, the stronger the volume is, the healthier the breakout will be.
  3. Strong price action is favorable in a breakout. Gap up movements (stock opening significantly above previous day’s close and maintaining the gain) and stock ending near the day’s high are good signs to see accompanying breakouts.
  4. A good breakout should have the support of a Confirmed Uptrend in the overall market. Breakouts in such markets have a higher chance of strong rally.

Related: 

Share market basics: Overhead Supply Can Repulse A Stock’s Climb

When To Buy Growth Stocks: How Pyramiding Up Can Be As Easy As A Cup Of Coffee

How Relative Strength Rating Helps You Pick Outstanding Growth Stocks

Read our last week’s article on:Checklist to a Simple Investment Routine

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Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.