Page 1213 - How to Make Money in Stocks Trilogy

196 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

More Second Chances with the “Base-on-Base”

Sometimes a stock will break out from a cup-with-handle or double bottom
but fail to make the typical 20%–25% gain before starting to form a new
pattern.
When that happens, we call it a “base-on-base” formation—and it can
lead to some powerful moves.

Starts forming second base
before rising at least 20%
from prior buy point

Breakout from first base

Base-on-base is often a combination of
cup-with-handle and flat base, but can
be formed with any type of base pattern

Here are the 2 key things to understand about a base-on-base:

• The stock must begin forming a new base before rising at least
20% from the ideal buy point in the prior pattern.
Here’s how that works.
Say a stock breaks out of a cup-with-handle with an ideal buy point of
$100. If it starts forming a flat base after climbing to just $115—only a
15% rise—the prior cup-with-handle and the new flat base would be con-
sidered one “base-on-base” formation.
• The ideal buy point depends on what type of pattern the second
base is.
While the second base in the base-on-base can be any type of pattern, it
often ends up being a flat base. Whatever type of formation it is, all the
normal criteria for that pattern still apply.
So if it’s a flat base, the ideal buy point would be 10 cents above the
peak in that flat base.
If the second pattern in the base-on-base is a cup-with-handle, then
the buy point would be 10 cents above the peak in the handle.