Frequently Asked Questions

Market Lab Report
How do you determine the base count stage of a stock?

Q: I seem to remember you and O'Neil saying that if the lows of a base are taken out then the base count is reset but the start of a new bull market or market rally also resets the base count. We had a new market rally recently but the Cloud Computing stocks seemed to be in advanced stage bases and they are now correcting (as of October 13, 2010). How do we reconcile these ideas and what is the best way to evaluate what stage base a stock is in?


A: We dont weigh base count that heavily since buying and selling pressure show up in price/volume action of a stock. That said, fourth stage and higher bases are more failure prone since statistics show stocks are potentially nearing the end of their long runs. However, the strongest stocks could have climax runs after their last stage base which you dont want to miss since the time value is enormous. Because it is impossible to know which stocks will have such dramatic runs into their ultimate tops, we stay focused on price/volume to keep me in or out of the stock. We dont want a late stage base in an exceptional stock to scare us into buying a smaller position. We'd rather place more importance on variables such as fundamental and technical strength of the stock.

For a base count to reset, the stock would have to undercut its prior base. Just because a new bull market begins does not reset base counts. It is best to monitor the stock itself for action that undercuts its prior base to reset its base count.

Published: Oct 13 2010