How To Invest In Stocks: Rare Base Formation Can Lead To Powerful Gains – Investor's Business Daily

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Diligent stock chart analysis is key to learning how to invest in growth stocks successfully. Those who take the time to learn the ascending base, one of the rarer patterns, will have a better chance of pinpointing new buy points and achieving bigger returns.

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If identified properly — and it’s an easy one to miss — this base can lead to solid gains.

While the definition of an ascending base sounds relatively straightforward — three pullbacks amid a series of higher price highs and higher price lows — context matters a great deal. To get the buy point in an ascending base, add 10 cents to the high of the third pullback, like you would with other IBD patterns.

Leading stocks tend to create ascending bases during extended periods of market weakness. The stock will hit a new high but is dragged down by general market conditions. Finally, when the market pressure is relieved, the stock is able to continue its advance.

The Specs Of The Base

Ascending bases are typically nine to 16 weeks in duration, starting with the first week down of the first pullback. In “How to Make Money in Stocks,” IBD founder William J. O’Neil notes that the depth of each pullback ranges from 10%-20%. The IBD MarketSmith Pattern Recognition algorithm scans for three pullbacks that correct between 6% and 25% to help compensate for a stock’s individual volatility.

Small-cap stocks tend to trade with more volatility than large-cap stocks, but both can form these bullish formations.

Martin Marietta Materials (MLM) formed a 14-week ascending base that had the right pieces.

During the first pullback, the supplier of building materials dropped 14% Nov. 3-4, 2020 (1) in an unusually swift dip. The next pullback was about 10% deep, from Dec. 8 to Dec. 14 (2). Finally, the last pullback was about 12% in Jan. 12-27, 2021 (3). During each pullback, the stock found support at its key 50-day moving average. 

Check out the relative strength line — the blue line on every IBD daily and weekly chart. It made a new high ahead of the third pullback and again on the breakout day, indicating that the stock was ready to become a market leader, but an uncooperative general market was holding it back.

The Breakout

On Feb. 11, MLM stock staged a mild breakout past the 319.11 buy point (4), peeking out just above the entry before closing beneath it. The following session, the stock followed through, rising nearly 4% on slightly above-average volume.

On May 10, the stock traded as high as 383.71, more than 20% past the 319.11 buy point. Investors should take most profits at the 20%-25% level. From there, Martin Marietta stock would go on to form a new base, falling as much as 14% from its highs.

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