THE BASING PATTERN
For me, the base is one of the most exciting patterns to recognize in all of technical analysis. In my experience, it is one of the best high-probability patterns to trade. A few years ago I posted an annual return of several hundred percent in my personal account, and I did so in large part by trading the basing pattern repeatedly. It made me a lot of money, so it is not a surprise I feel affectionate toward it.
A strong base should last about two months at minimum. The longer it lasts, the more significant it is. Often the base will take an idealized "U" shape, although an ascending triangle will do nicely as well.
When a base is completed and a breakout occurs, ideally this breakout will occur on well above typical volume. The higher the volume on the breakout, the better. Strong volume shows that buyers are willing to pay higher prices since they are confident the shares are going to rise in value after they purchase them.
I've already described the measuring principle in a previous INSIDE THE BLACK BOX article (you can find this in our issue archives in our February 3rd, 2003 issue). The measuring principle yields a minimum target, although it is very possible for this target to be exceeded.
In last week's StreetAuthority Swing Trader issue (March 17th), I flagged Fluor (FLR) as it broke out of a base on high volume. As you look at the chart above, notice how the stock exhibited the qualities of a good base. It formed a "U" pattern and then broke out on very high volume. MACD confirmed the move and momentum (as measured by the histogram) increased dramatically. Although the indicators reached overbought levels, they did not issue sell signals. Fluor has surpassed the minimum target of $34.60 or so, but still seems to be going strong.
