Stock Chart Skills: The Beauty Of A Symmetrical Base
There is nothing like scanning through scores of charts to make you appreciate the rarity of a nicely formed base. One of the traits that make such pieces of work stand out is symmetry.
Bases happen all the time. And usually they look like what they are: random patterns formed by the combined forces of supply and demand. The result tends to be consolidations that look like jagged cups — steep, craggy double-bottoms or flat bases that aren't really flat.
So when you happen across a cup base that is evenly carved, in which down weeks in price equal up weeks and trading ranges are similar, it makes an impression.
A double-bottom base in which the first lobe is roughly equal, in length and depth, to the second, and in which no price spikes or deep sell-offs interrupt the flow, stands out as a thing of beauty.
Symmetrical bases generally signal a lack of volatility in the stock. Consolidations generally begin with prices declining rapidly as institutional investors take profits. The chart rises out of the pattern as other big investors move in to set up shop. Symmetry suggests an element of control in this transition. The institutions exerting that control ultimately want the stock to go higher.
It's also important to keep in mind that bases are made up of many factors and none guarantee a successful breakout. Each positive element reduces the risk a of a breakout failure. But you must always remain ready with your sell rules and ready to opt out if the stock falls to the limit of your risk tolerance. Tableau Software (NYSE:DATA) is a good example of a stock that cleared a symmetrical cup in January 2014, then quickly gave back all of its gains from a 77.84 entry point and more.
Symmetry comes in many forms. And it can, at times, be subtle. Actavis (NYSE:ACT) had put in a nice run before plateauing in May 2013 and beginning what would become an eight-week flat base.
The first four weeks of the base established its range in one week down, two weeks up and one more week down. Both down weeks closed very low in their trading range (1). Both up weeks closed high in the range. That's a unique form of symmetry.
In the next four weeks, Actavis felt its way along the top end of its trading range, posting tight closes. The drugmaker reached down and kept tabs on its rising 10-week moving average.
Notice how for eight weeks in a row, the weekly highs were nearly uniform, helping to create the look of a rectangle, which itself contains elements of geometric symmetry. In the final week of the base, the stock price ventured slightly below the 10-week line but quickly retook that support.
The breakout past 133.10 in big trade on July 26-29 mirrored the left-side wall that had started the base in late May. The stock has climbed 123% in 18 months.
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