Checklist for Bases with Net Distribution

Note:  This 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.

Question #2:  Have any of its peers recently broke out?

Group leadership is an important component of robust bull markets.

Group leadership occurs when multiple stocks within the same group break out of bases and start to trend higher.

These breakouts provide the leadership that's important to a durable market uptrend.

A good generalization to make is that if one stock in a group breaks out, others in the group are likely to follow.

While there's no guarantee that other group members will follow, it's common for stocks in the same group to move in unison given the backdrop of a strong market.

This "follow the leader" characteristic of group moves may override technical flaws such as net distribution within a base.

Historical Stock Chart Examples 2A & 2B:  PMC-Sierra (PMCS) 1999

PMC-Sierra (PMCS) was one of the beneficiaries of the late '90s Internet build out.  

PMC-Sierra along with its semiconductor peers experienced huge price gains between 1998 and the March 2000 top.

In the Fall of 1999, PMCS took a breather and set up in an 11-week base.  

However, upon further inspection, its base showed 3 weeks of distribution and 2 weeks of accumulation.  

Was this a cause for concern?

No and here's one possible reason why.

A month before PMCS left its base behind and started an advance, many of its peers started breaking out of bases during the initial surge off the October 1999 Bottom.

Marquee institutional names like Broadcom (BRCM), Q-Logic (QLGC), Triquint Semiconductor (TQNT) and Applied Micro Circuits (AMCC) were pressing into new high ground as the technology stock feeding frenzy entered its final phase.

By the time PMCS broke out (12/3/99), its fellow group members had already gone up anywhere from 15-55%.

From its base that featured net distribution, PMCS advanced 350% to the March 2000 top.

The semiconductors were involved in a strong group move during late 1999 and early 2000.

Question #3:  Did the stock outperform the market before it began basing?

I like to call this the outperformance factor.

When looking for the outperformance factor, you're searching for signs of strength while the market is weak and floundering around.

For example, a sign of strength (outperformance) may be when a stock is trading above all of its main moving averages while the market is trading below them as is often the case in a bear market.

If you can find a sign of strength, you may want to give the stock the benefit of the doubt despite the distribution in its base.

After all, there might be something good about the stock if it outperformed the market in the first place.

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