While the stock market continues to vacillate between a possible Santa rally and collapse, several stocks continue to behave quite well. There are several stocks that have ignored the recent volatility and have been working on the right side of their base.
When a stock begins to build a base, it begins by correcting from a higher price and then attempting to form a bottoming pattern. Once the stock has consolidated, it will start to test for a breakout and, in effect, end the consolidation. This price action obviously occurs on the right side of the chart, as it is the current price action and is meant to identify the final stages of a consolidation. Some positive traits to look for in a stock working on the right sides of their bases is a narrowing in the range of its price action and strong volume on positive days.
Atlas Pipeline Partners, L.P. (NYSE:APL), for instance, has been consolidating in a tight range after clearing a resistance level in October. This price action can be classified as "working on the right side of the base," as APL hasn't truly embarked on a new up trend yet. It can do so with a breakout above $36, but it could also reverse course on market weakness and fall back under $32. However, it is very constructive that APL has been able to narrow in price range over the past few weeks after the considerable volatility that occurred in August through October. If the market were to gain strength, it could help propel APL above the current base. (For related reading, check out the Long Straddle and Price Consolidation.)
Another stock working on the right side of its base is NewMarket Corp. (NYSE:NEU). NEU cleared a resistance level in October and has been building a base-on-base pattern. This is simply a secondary consolidation near the top or just above the prior base. NEU has also narrowed considerably in its price range and has been in a 10-point range for a few weeks. The $200 level should be closely watched as a clear resistance level in NEU. Any sustained strength above this level would imply a much stronger breakout.
Humana Inc. (NYSE:HUM) is another stock that could be close to emerging from its base. One could say it already has broken out since it tagged new all-time highs a few weeks ago, but the pattern more closely resembles the same base on base pattern NEU is following. In either case, the pattern looks very constructive, with HUM trading in a much more narrow range and remaining above prior resistance near $80. Volume was highest on the initial thrust higher and could signify institutional participation. (For more, see Confirming Price Movements With Volume Indicators.)
Silicon Laboratories, Inc. (Nasdaq:SLAB) is a good example of what could be considered a cup-with-handle pattern. Notice how the correction that began in July was followed by a lateral consolidation in August through October. This was the initial stages of the cup, which was completed as SLAB rose vertically on good volume in late October. SLAB is now working on the right side of the base by building the handle portion of the pattern. Any break above this area could lead to a solid breakout.
The Bottom Line
Often traders get caught up in specific pattern types or named chart patterns, but in reality, price action is very similar across several price patterns. Stocks working on the right side of their base have already undergone the corrective process and are close to testing for a breakout. Of course they can fail this test and reverse lower, but this is why it's called trading and not printing money. If a stock can emerge from the right side of a base, it often signifies that a new trend higher has been established and it would likely offer a great trading opportunity.
Charts courtesy of stockcharts.com
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.