Page 1193 - How to Make Money in Stocks Trilogy

176 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

■ ✔ Prior uptrend: 30% or more

To form a proper “base” or chart pattern, you have to have a prior
uptrend. The idea behind a base is that after making a decent run, the stock
is now digesting those gains as it catches its breath in preparation for an
even higher climb. In other words, it’s forming the “stepping stones” we dis-
cussed in the section on support and resistance.

Backstory
The prior uptrend typically happens when the overall market is moving
higher. When that uptrend starts to slip into a correction, even the top
®
CAN SLIM stocks will likely pull back and start forming a new base.
When that happens, savvy investors who got in early on that uptrend will
start to cash in their gains. You’ll probably see your 20%–25% profit-taking
rule kick in around this time.
But it’s a very different story for people who did not get in early and
ended up buying at the end of that prior uptrend. Because they didn’t have
proper buy rules like the ones in the Buying Checklist, they bought just as
the overall market weakened and the stock itself started to decline. And
since they probably don’t have proper sell rules either, they’ll soon be sitting
on a big loss.

■ ✔ Base Depth: 15%–30%

The depth of the base—measured from the peak on the left side of the
cup to the lowest point (the “bottom”) of the cup—should be between
15%–30%. In a severe bear market, the depth may be 40%–50%. As a gen-
eral rule, look for stocks that held up relatively well during the market cor-
rection. So if one stock on your watch list dropped 35% while another’s base
depth is only 20%, all else being equal, the stock with the 20% decline could
be forming a stronger base.

Backstory
Remember those folks who bought too late in the prior uptrend? They’re
now sitting on significant losses, just hoping and praying to somehow get
back to breakeven.