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.

Historical Stock Chart Examples 3A & 3B:  J2 Global Communications (JCOM) 2003

J2 Global Communications (JCOM) went on a nearly 500% advance from February 2002 to November 2002 before falling into a well-deserved basing period. 

During that time, the market, locked in a bearish move lower, fell 20%.

J2 clearly stood out at a time of extreme market weakness, but its basing period yielded a 19-week base that contained more distribution than accumulation.

J2 Global Communications shrugged it off and broke out in late March 2003, which also happened to be the start of the 2003-2007 Uptrend.

JCOM proceeded to go up another 275% before topping out in October 2003.

JCOM outperformed in a weak market and was rewarded when the market turned in 2003.

Question #4:  Did price hold the 40 Week MA during the basing period?

I've noticed that if a stock can hold its 40 Week Moving Average (MA) during a market correction, it has the potential to break out if the market turns back higher.

This behavior stands out even more when a stock holds its 40 Week MA, but the market can't.

As a general rule, a stock that holds its 40 Week MA while the market went below it is a positive divergence worth noting despite the distribution within its base.

Historical Stock Chart Examples 4A & 4B:  Fossil (FOSL) 2010

Fossil went on a 280% run after bottoming in early 2009.

It then set up in its first base, a choppy, 15-week consolidation, which featured net distribution.

However, during the market's 2010 Correction, Fossil was able to hold above its 40 Week MA while the market couldn't, a bullish divergence.

Fossil then broke out ahead of the market (a sign of leadership) and rallied 215% before topping out in July 2011.

FOSL based above its 40 Week MA when the market couldn't and it turned out to be a market leader.

Question #5:  Did the stock show evidence of price thrusting within its prior uptrend?

Sometimes looking at a base with a wide-angle lens can give you a different perspective on the health of a stock.

What exactly do I mean?

Please let me explain.

Many stock investors only use the price action within a base to determine whether or not a stock is healthy.  

However, this can be misleading because it ignores demand (volume) for the stock that led up to its basing phase.

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