How To Find Ascending Bases That Lead To Powerful Advances

In a choppy market, leadership stocks sometimes act like runners on base. The player leads off, is forced back when the pitcher throws to first, then steals second and leads off again. When the next batter up blasts one for the fences, the man at second explodes, rounding third base, then slides home.

The same behavior sometimes occurs in strong, momentum stocks ahead of market turns to the upside. A leader will consolidate, charge higher, pull back, consolidate, advance again, then pull back again. Each time, like a runner stealing bases, the stock never quite breaks loose, but still makes progress, forming a series of higher highs and higher lows. When at last the market comes alive, the resistance lifts, and the stock flies on a breakout.

That's the profile of the ascending base, a rare and tricky pattern that can lead powerful advances in leadership stocks. In this pattern, the stock will form three successive consolidation zones. Some may be long enough -- five weeks -- to be called a base.

The first two breakouts will fail, but then, rather than selling off, the stock forms a successive zone characterized by higher highs and higher lows than the prior zone. The third, final zone should tighten relative to the ranges of the prior zones. The breakout from the third zone is where you buy (remembering, of course, to set an initial stop to protect you in the event the breakout fails).

America Online (AOL | Quote | Chart | News | PowerRating) broke out of an ascending base in early 1999. Prior to the breakout, the Internet giant was a clear leader, having more than tripled in price from its Oct. 8, 1998 low.

On Jan. 11, 1999, AOL shares broke out of two-week consolidation zone (see Point A on the chart), then promptly failed the next session. Rather than selling off, the stock recovered quickly and two weeks later staged another breakout attempt (Point B).

This second rally failed a few days later. But notice how the stock consolidated rather than corrected. The low of this second zone (Point C) came in well above the low of the first zone (Point D).

On Feb. 23, the stock moved to new high ground (Point E), then fell back as well. Notice how AOL underwent an extreme volatility contraction from here. In effect, the stock formed a handle. The breakout came on March 9 when the stock exceeded the handle high (Point F).

Taking a closer look, even if you were unfamiliar with the ascending base, you could have recognized a cup-with-handle pattern, albeit without the heavy volume that makes for the perfect handle breakout.

JDS Uniphase (JDSU | Quote | Chart | News | PowerRating) formed an ascending base later that same year. Shares in the fiber-optics gear maker staged failed breakouts on May 12 (Point A) and June 7 (Point B) before the third time proved the charm on June 29 (Point C). Note again how each successive zone formed a lower bottom (indicated by red arrows in the chart).

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