Banking

When To Buy Growth Stocks: Flat Base, Square Box Show Bullish Action |

Good things, they say, come in small packages. That can be true for chart patterns, too. One example: the square-box base. As the shortest possible base within IBD’s collection of winning patterns, it can form in as few as four weeks and lasts no more than seven weeks.




X



For chart readers, square boxes seem to happen in the wink of an eye.

Aruba Networks cleared a square box on Aug. 27, 2010. Latin American brewery giant AmBev (ABEV) (also known as Companhia de Bebidas das Americas) topped one the week ended Sept. 3, 2010. Ebix (EBIX) cleared a square box that formed within a larger base in the week ended Sept. 24. All have since gained 20% or more.

Like a flat base, a square box corrects no more than 15% from top to bottom. Volume tends to dry up through the correction and surges at the breakout. The correct buy point is the highest intraday price within the pattern, plus a dime.

Is It A Square Box? Or Flat Base?

The flat base must last a minimum five weeks, but can be much longer than a square box. Unlike the rounded bottom seen in a cup or in two down legs in a double bottom, the flat base’s shape looks like its name implies — flat, sideways movement.

The square box is the newest base in the CAN SLIM arsenal. It was introduced in the fourth edition of “How to Make Money In Stocks,” written and published in 2009 by IBD founder and Chairman William O’Neil. “I’ve noted this pattern over recent years,” O’Neil wrote, “but finally we’ve studied, measured and classified it.”

As with all bases, you typically start your count of weeks for a square box during the first down week. That means the first week to log a Friday close that’s below the prior Friday’s close. A good example is Southwest U.S. oil producer Concho Resources (CXO).

Square Box And A Flat Base

Concho broke out of a cup-with-handle base in the week ended Aug. 7, 2009 (1). It quickly eased into a shallow correction the next week. It dipped 12%, and briefly touched its 10-week moving average during the fourth week of its pullback. A square box — as well as a base-on-base pattern — was born.

Concho rose off its 10-week line in weak trade for three days. Heavy trading then boosted it above the base’s 35.37 buy point (2) as the stock gained 11% for the week. This was a telltale sign of institutional buying. At the time, Concho marked an 88 Composite Rating and a 78 for Relative Price Strength.

It pulled back to its 10-week moving average twice as it climbed 24% over the next two months. Then Concho slipped into what would become a second square-box base in November (3).

Notice in this square box how the lows from week to week were close in price — 40.24 in the week ended Nov. 20, 2009, then 40.33, 40.19 and 40.35. In the week ended Dec. 18, Concho jumped 9% and cleared its new buy point of 44.08, or 10 cents above the highest price within the box (4). The stock also leapt to an all-time high.

Volume that week was weak, however (5). Perhaps this explains why the stock soon formed a seven-week cup-with-handle from January to February of this year (6).

Because a square box or flat base is a base pattern, it is included in a stock’s base count. Look for a 20% gain from a prior base’s buy point before counting it as a separate base, though. A square box can also form as part of a base-on-base pattern, which counts as a single base.

A version of this column was originally published in the Oct. 28, 2010, edition of IBD. Aruba Networks was acquired by Hewlett-Packard in May 2015. Concho Resources got bought by ConocoPhillips in 2021.

RELATED:

How To Read Charts: Know The Critical Factors Of A Good Handle On A Base

Master The Cup With Handle, Enhance Your Stock Market Profit

The Case For A Trump-Era Secular Bull Run In Stocks

How To Invest: Do Markets Care Who Is President?

Most Related Links :
editorpen Governmental News Finance News

Source link

Back to top button