Ascending Bases

Ascending bases, like flat bases, occur midway along a move up after a stock
has broken out of a cup-with-handle or double-bottom base. They have
three pullbacks of from 10% to 20%, with each low point during the sell-off
in price being higher than the preceding one, which is why I call them
ascending bases.
Each of the pullbacks usually occurs because the general market is
declining at that time.
Boeing formed a 13-week ascending base in the second quarter of 1954
and then doubled in price. Redman Industries, a builder of mobile homes,
had an 11-week ascending base in the first quarter of 1968 and proceeded
to increase 500% in just 37 weeks. America Online created the same type of
base in the first quarter of 1999 and resumed what turned out to be a 500%
run-up from the breakout of a 14-week cup with handle in October 1998.
So you see, history does repeat itself. The more historical patterns you
know and come to recognize, the more money you should be able to make
in future markets. (See the chart examples in Chapter 1, and also Simmonds
Precision, Monogram Industries, Redman Industries, America Online, and
Titanium Metals.

Wide-and-Loose Price Structures Are Failure Prone
Wide-and-loose-looking charts usually fail but can tighten up later. New
England Nuclear and Houston Oil & Minerals are two cases of stocks that
tightened up following wide, loose, and erratic price movements. I cite
them because I missed both of them at the time. It’s always wise to review
big winners that you missed to find out why you didn’t recognize them when
they were exactly right and ready to soar.
New England Nuclear formed a wide, loose, and faulty price pattern that
looked like a double bottom from points A, B, C, D, and E. It declined
about 40% from the beginning at point A to point D. That was excessive,
and it took too much time—almost six months—to hit bottom. Note the
additional clue provided by the declining trend of its relative strength line
(RS) throughout the faulty pattern. Buying at point E was wrong. The han-
dle was also too short and did not drift down to create a shakeout. It wedged
up along its low points.
New England Nuclear then formed a second base from points E to F to
G. But if you tried to buy at point G, you were wrong again. It was prema-
ture because the price pattern was still wide and loose. The move from point
E to point F was a prolonged decline, with relative strength deteriorating
badly. The rise straight up from the bottom at point F to the bogus breakout
point G was too fast and erratic, taking only three months. Three months of
improving relative strength versus the prior 17 months of decline weren’t
enough to turn the previous poor trend into a positive one.
The stock then declined from point G to point H to form what appeared
to be a handle area for the possible cup formation from points E to F to G. If
you bought at point I on the breakout attempt, the stock failed again. Reason:
the handle was too loose; it degenerated 20%. However, after failing that
time, the stock at last tightened up its price structure from points I to J to K,
and 15 weeks later, at point K, it broke out of a tight, sound base and nearly
tripled in price afterwards. Note the stock’s strong uptrend and materially
improved relative strength line for 11 months from point K back to point F.
So, there really is a right time and a wrong time to buy a stock, but under-
standing the difference requires some study. There’s no such thing as being
an overnight success in the stock market, and success has nothing to do with
listening to tips from other people or being lucky. You have to study and pre-
pare yourself so that you can become successful on your own with your
investing. So make yourself more knowledgeable. It isn’t easy at first, but it
can be very rewarding. Anyone can learn to do it. You can do it. Believe in
your ability to learn. Unlearn past assumptions that didn’t work.
Here are some faulty wide-and-loose patterns that faked people into buy-
ing during the prolonged bear market that began in March 2000: Veritas
Software on October 20, 2000; Anaren Microwave on December 28, 2000;
and Comverse Technology on January 24, 2001.
The aforementioned Houston Oil & Minerals is an even more dramatic
example of the handle correction from point F to point G being a wide-and-
loose pattern that later tightened up into a constructive price formation (see the
accompanying chart). A to B to C was extremely wide, loose, and erratic (the
percent decline was too great). B to C was straight up from the bottom without
any pullback in price. Points C and D were false attempts to break out of a faulty
price pattern, and so was point H, which tried to break out of a wide-and-loose
cup with handle. Afterward, a tight nine-week base formed from points H to I
to J. (Note the extreme volume dry-up along the December 1975 lows.)
An alert stockbroker in Hartford, Connecticut, called this structure to my
attention. However, I’d been so conditioned by the two prior years of poor
price patterns and less-than-desirable earnings that my mind was slow to
change when the stock suddenly altered its behavior in only nine weeks. I
was probably also intimidated by the tremendous price increase that had
occurred in Houston Oil in the earlier 1973 bull market. This proves that
opinions and feelings are frequently wrong, but markets rarely are.
It also points out a very important principle: it takes time for all of us to
change opinions that we have built up over a substantial period. In this
instance, even the current quarterly earnings turning up 357% after three
down quarters didn’t change my incorrect bearish view of the stock to a
bullish one. The right buy point was in January 1976.

In August 1994, PeopleSoft repeated the New England Nuclear and Hous-
ton Oil patterns. It failed in its breakout attempt from a wide, loose, wedging-
upward pattern in September 1993. It then failed a second time in its
breakout attempt in March 1994, when its handle area formed in the lower
half of its cup-with-handle pattern. Finally, when the chart pattern and the
general market were right, PeopleSoft skyrocketed starting in August 1994.
In the first week of January 1999, San Diego–based Qualcomm followed
PeopleSoft’s three-phased precedent. In October 1997, Qualcomm charged
into new-high ground straight up from a loose, faulty base with too much of
its base in its lower half. It then built a second faulty base, broke out of a
handle in the lower part, and failed. The third base was the charm: a prop-
erly formed cup with handle that worked in the first week in January 1999.
Qualcomm went straight through the roof from a split-adjusted $7.50 to
$200 in only one year. Maybe you should spend more time studying histori-
cal precedents. What do you think? If you had invested $7,500 in Qual-
comm, a year later it would have been worth $200,000.

Detecting Faulty Price Patterns and Base Structures
Unfortunately, no original or thorough research on price pattern analysis
has been done in the last 78 years. In 1930, Richard Schabacker, a financial
editor of Forbes, wrote a book, Stock Market Theory and Practice. In it he
discussed many patterns, including triangles, coils, and pennants. Our
detailed model building and investigations of price structure over the years
have shown these patterns to be unreliable and risky. They probably worked
in the latter part of the “Roaring ’20s,” when most stocks ran up in a wild,
climactic frenzy. Something similar happened in 1999 and the first quarter
of 2000, when many loose, faulty patterns at first seemed to work, but then
failed. These periods were just like the Dutch tulip bulb craze of the seven-
teenth century, during which rampant speculation caused varieties of tulip
bulbs to skyrocket to astronomical prices and then crash.
Our studies show that, with the exception of high, tight flags, which are
extremely rare and hard to interpret, flat bases of five or six weeks, and the
square box of four to seven weeks, the most reliable base patterns must have
a minimum of seven to eight weeks of price consolidation. Most coils, trian-
gles, and pennants are simply weak foundations without sufficient time or
price correction to become proper bases. One-, two-, and three-week bases
are risky. In almost all cases, they should be avoided.
In 1948, John McGee and Robert D. Edwards wrote Technical Analysis
of Stock Trends, a book that discusses many of the same faulty patterns pre-
sented in Schabacker’s earlier work.
In 1962, William Jiler wrote an easy-to-read book, How Charts Can Help
You in the Stock Market, that explains many of the correct principles behind
technical analysis. However, it too seems to have continued the display and
discussion of certain failure-prone patterns of the pre-Depression era.
Triple bottoms and head-and-shoulders bottoms are patterns that are
widely mentioned in several books on technical analysis. We have found
these to be weaker patterns as well. A head-and-shoulders bottom may suc-
ceed in a few instances, but it has no strong prior uptrend, which is essential
for most powerful market leaders.
When it comes to signifying a top in a stock, however, head-and-shoul-
ders top patterns are among the most reliable. Be careful: if you have only a
little knowledge of charts, you can misinterpret what is a correct head-and-
shoulders top. Many pros don’t interpret the pattern properly. The right
(second) shoulder must be slightly below the left shoulder.
A triple bottom is a looser, weaker, and less-attractive base pattern than a
double bottom. The reason is that the stock corrects and falls back sharply
to its absolute low three times rather than twice, as with a double bottom, or
once, as in the strong cup with handle. As mentioned earlier, a cup with a
wedging handle is also usually a faulty, failure-prone pattern, as you can see
in the Global Crossing Ltd. chart example. A competent chart reader would
have avoided or sold Global Crossing, which later went bankrupt.