Base Building and Stocks Coming out of a Base: The base of a stock is built when a stock trades in a tight price range and the price chart subsequently creates a flat looking display or a saucer.
This base generally acts as a springboard from which a stock’s price can bounce higher. Typically, a stock’s base building period lasts 8 to 12 weeks, although there are many cases of this period being shorter as well as longer.
While in a period of basing, pent up demand for the stock will be building, and if the base is properly formed, the stock will break out of its base and the price will rise above its recent range.
If the breakout occurs on large volume, that is very positive and oftentimes, it will be the beginning of an upward move.
Moving Average: A widely used indicator in technical analysis that helps smooth out price action, by filtering out the “noise” from random price fluctuations.
A moving average (MA) is a trend-following or lagging indicator because it is based on past prices.
The two basic and commonly used MAs are:
- The simple moving average (SMA), which is the simple average of a security over a defined number of time periods.
- The exponential moving average (EMA), which gives bigger weight to more recent prices.
The most common applications of MAs are to identify the trend direction and to determine support and resistance levels. While MAs are useful enough on their own, they also form the basis for other indicators such as the Moving Average Convergence Divergence (MACD).
Relative Strength: This is a rating that compares the performance of a stock to that of the overall market. Relative strength calculates which investments are the strongest performers compared to the overall market.
Relative Strength Line: The simplest way to compute relative strength is by taking a stock’s price and dividing it by the price of the S&P 500.
An increasing relative strength line tells us that a security is outperforming the S&P 500, while a dropping line tells us that it’s underperforming.
The key word here is “relative” — a rising relative strength line doesn’t mean that a stock is increasing in value. It only tells us that it’s outperforming the broad market.
Technical Analysis: This is a form of security analysis methodology for forecasting the direction of prices through the study of historical precedence of past market cycles and stock behavior.
Analysis uses the price history of a stock combined with tools, such as the moving average, relative strength and bases (all mentioned above) to help predict the future direction of a stock’s price.