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Tickers in this Article: UHAL, ALLT, SYKE, PPO
With the markets beginning to get overbought on shorter time frames, it has become even more important for traders to focus on limiting their risk. One way for a trader to limit risk is for them to focus on stocks that are not yet extended from their base. When a market becomes extended, it becomes vulnerable to profit taking. This can cause many stocks to suffer through a pullback that seems severe, while in reality, the stock is simply fluctuating in a normal manner. By focusing on stocks that are just emerging from a base, a trader can remove much of the guess-work in deciding between what is a normal pullback and what is a breakdown. Either the stock clears the base, or it doesn't. The risk is well defined, which is objective No.1 for a trader. Tutorial: Technical Analysis

Amerco (Nasdaq:UHAL), for instance, appears to be close to challenging for a breakout of the base it has been building for several months. UHAL has been consolidating a strong rally and has been narrowing in range as the stock fluctuates between the bottom and top of the base. UHAL is currently testing the $100 level, which coincides with a trend line marking the most recent highs within the base. If UHAL can clear this trendline it may be headed for a true breakout and new all-time highs.


Source: StockCharts.com


Polypore International (NYSE:PPO) is another stock testing the top of its base. PPO has been consolidating in an ascending triangle pattern for a few months after doubling in price in a span of just four months. It often takes a lot of time to consolidate such a strong advance, but PPO has been coiling tightly and should be watched to see how it deals with the important resistance level near $60.


Source: StockCharts.com


While Sykes Enterprises (Nasdaq:SYKE) didn't double in price like PPO, it is also consolidating after a sharp rally last year. SYKE is showing a different pattern, as it has been drifting back toward some prior support and resistance levels. One level that may not be apparent at first as an important area is the $19 level, which capped off the initial rally last November and then became support on several occasions. SYKE also broke down under this level late in February where it then became resistance. However, this may have been a bear trap as SYKE reclaimed $19 and may be close to challenging for a breakout above the base.


Source: StockCharts.com


Allot Communications (Nasdaq:ALLT) is another stock that could be close to emerging from its base. ALLT actually more than doubled late in 2010 in an amazing display of strength. When ALLT began to consolidate in early 2011, it was understandably quite volatile as profit taking and dip buying were occurring at many different levels. However, ALLT has been calming down and the trading range has narrowed considerably. Throughout the transition, the $16 level has held firmly as resistance. Traders need to monitor this area for a possible breakout.


Source: StockCharts.com


The Bottom Line
While none of the stocks mentioned in this article has actually broken out of its base, they are all certainly worth monitoring. Chasing stocks that are extended from their bases is very difficult, especially if a trader is not prepared to sit through profit taking and normal fluctuations in a stock's trading price. Stocks that are emerging from a base offer clear entries and exits for a trader, which helps immensely in limiting a trader's risk. If the stock never clears the base, there is no trade, which is another benefit for the trader. Whether the stock goes up or down, the trader has eliminated all the guesswork out in the equation.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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