3 Groups of Bases that Power Market Uptrends

by Erik Grywalski
   

Note:  The following article is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

In my studies of past bull markets, I've noticed three (3) groups of bases that power market uptrends.

To be clear, I'm not referring to the specific shape of a base (Cup with Handle, Double Bottom, etc.).

Instead, I'm talking about a cycle of bases that provide leadership to help drive the market higher.

But before I describe them, I must first explain the basics of bases and why they're important.

Below, I have listed some common Q&A about bases:

What is a base?

A base or consolidation is a resting period in a stock's uptrend where price digests its prior advance.

When do bases form?

Bases form during cyclical stock market corrections, secular bear markets or evolve independent of the market's price action.

How long is a base and what does it look like?

Bases can vary in duration from 4 weeks to several months/years and trace out a back-and-forth (sideways) price pattern or a more noticeable price decline that's followed by a recovery near its former high.

Why are bases important?

A base is the foundation from which a stock launches an advance and is a precursor of market leadership.

Almost all durable market uptrends begin with stocks breaking out of bases after the market's corrective period or bear market has run its course.

This is not new information, but it's an important signpost of market uptrends.

Simply put, strong market uptrends like to feed on a steady diet of base breakouts.

What does a breakout mean?

If you take a step back from the charts and think about what a base breakout means, you may get a better understanding of why they're linked to market uptrends.

When a stock breaks out of a base, it often surpasses its old high.

This price action implies that investors are more optimistic about the company's economic prospects because they are willing to pay a higher price for the stock than they were before the correction began.

Now - what if there were scores of stocks from different industries breaking out of bases?

That usually means that the market believes that the prospects for the broad economy are improving.

Do you understand why base breakouts are a part of market uptrends that precede economic expansions?

With the ABCs of bases now covered, I'm going to introduce you to the 3 groups of bases that power market uptrends.

Understanding the Base Cycle

If you'll remember back to the beginning of this article, I mentioned a "cycle of bases" that power market uptrends.

This cycle is called the Base Cycle.

The Base Cycle is a term that I came up with to describe the evolution of stock leadership within an emerging stock market uptrend.

The word, evolution, implies a maturation process (development) or progressive change.

In the market's case, it's the progressive change in its technical structure as it transitions from correction to market uptrend.

This change may be seen in 3 groups of bases:

1.  Leading Bases

Leading Bases are stocks that break out when the market is hitting new lows within a bear market/correction or just consolidating sideways within a trading range.

These stocks stick out like a sore thumb because they break out and lead ahead of the market.

Leading bases can help you gauge market sentiment during a period of declining stock prices or within a choppy market environment.

After Leading Bases break out, how do they act?

Do they fail right away and violently plunge back into their respective bases or do they hold their breakouts and grind higher as the market's under pressure?

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