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home | Finding Base Troughs

Step 2: Improve Attention to Detail (Finding Base and Handle Troughs)

by Erik Grywalski

Note:  The following historical stock research is for EDUCATIONAL USE ONLY.  It is NOT to be used to make buy/sell decisions in today's market.  For more information, please read the HSR Terms of Use.

Here, you'll learn about my process for finding price troughs within bases and handles.

I developed this so that I could find stocks that had the potential to bottom before a base was evident and/or to find stocks that may be getting ready to break out.

This will help you identify bases earlier than normal because it's based on common behaviors of price.

Finding base and handle troughs is for stock investors who want to monitor a stock's price action closely before a potential base breakout.

This won't catch every stock making a potential low because some stocks may not exhibit all of these price behaviors (technical events).

My approach is based on a combination of 3 technical events (price behaviors) that mostly take place during price retracements.

Fundamental analysis is also important and should be included with the technical stock research that I discuss with you.

Before I share my technical work, please understand that my historical examples ARE NOT backtested entry models.

They are based solely on my studies of price behaviors and are only meant to help you identify potential reversal zones (base and handle troughs) within stocks.

Let me now introduce you to three (3) technical events that may lead to a potential base/handle trough:

Event #1:  Market Catalyst

If you've ever taken a chemistry class, you know that a catalyst helps speed up a chemical reaction.

A market catalyst works the same way because it may move a stock up faster than normal or make a move higher more probable due to market related forces.

Here are some examples of market catalysts (technical factors):

a.  An undercut of a prior swing low or support level by a stock market index.

Why may this be a catalyst?

Markets tend to bounce (or rally fiercely) after a prior low is undercut and the market is overstretched to the downside. 

This is a natural reaction in both bull and bear markets.

If a stock's correction coincides with an index undercut, it can stop moving lower and may head higher if the market starts to rally.

To be clear, predicting that an undercut will naturally bounce can also be deadly because price can keep moving lower.  

That's why it's important to wait for price to at least rally back inside the range/undercut level before looking for a potential bounce.

A reversal higher may come on the same day/week as the undercut or it may be delayed several days/weeks.

When a rally back inside the range occurs, it signals that a low may have been put in on the undercut.

b.  Strong group action within a particular industry or sector.

Why may this be a catalyst?

Stocks in the same group tend to move together.

If a stock is basing and other group members have already broken out, chances may favor a stock joining the group move if the market/group is strong.

c.  Trending stock averages

Why may this be a catalyst?

Most stocks follow the market's main trend.

During strong uptrends, fresh base breakouts feed/reinforce the market's move higher.

If a stock is basing, it may get swept up in the market's bullish euphoria.

Event #2:  Retracement to a Prior Demand Week (PDW) or Prior Demand Month (PDM)

A common stock price behavior within uptrends is a retracement to a Prior Demand Week (PDW).

When a stock retraces to a PDW, it may find support and start to work its way higher.

Sometimes price will go below a PDW, but I may still consider it a valid signal if it is surrounded by other positive factors.

I covered PDWs in Step 1 (Base Behaviors).

If you skipped Step 1 or want to revisit the PDW concept again, you can do so by clicking here.

A Prior Demand Month (PDM) is identical to a PDW except that it's taken from the monthly chart time frame.

Event #3:  Bottoming Price Behaviors and/or Retracement to Support within a PDW/PDM

The last event that I look for includes price behaviors that indicate a potential change in direction within a PDW or PDM.

This may include:

All three technical events do not have to occur on the same week/month or in a specific order, but sometimes they do converge and create excellent confluence.

Would you like to see how these events work together using a historical example?

I annotated a historical stock chart that may help you understand potential base troughs using the three events described above.

Note:  The historical stock example given below is for EDUCATIONAL USE ONLY.  It is NOT to be used to make buy/sell decisions in today's market.  For more information, please read the HSR Terms of Use.

Please >>CLICK HERE<< to get the chart example.