It's one thing to identify a base on a stock chart. Identifying its good and bad parts is another. That's a process in stock analysis that requires studying each week in the pattern.
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"You want to judge how much price progress up or down the stock made during each week and whether it was on increased ordecreased volume from the prior week," IBD founder William O'Neil wrote in "How to Make Money in Stocks."
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Alsolook for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
On weekly charts, look for weeks with above-average or sharply higher volume than in the previous week. In the same week, watch for price declines that are much smaller than in the previous few weeks. In other words, the price decline slows even as trading remains heavy.
This stock analysis signal is stronger when the stock closes high in its weekly price range and the price range itself is wider than usual.
To be sure, churn is found in relatively few bases. Among the few examples was Franco-Nevada (FNV), the mining royalties company.
Stock Analysis Of Mining Stock
The stock formed a shallow cup-with-handle base in March through May of 2019.
The week ended May 3, 2019, saw volume jump well above average and 70% above prior weeks' turnover (1), yet the stock dropped a mild 0.4% that week.
This was positive churn. IBD's O'Neil had a special term for it: heavy volume without further price deterioration. Franco-Nevada had fallen 1.3%, 4.7% and 0.2% the prior three weeks, so downward momentum was definitely slowing. The base bottomed during these three weeks.
With the firm bottoming in place,Franco-Nevada broke out past a 77buy point in heavy volume onMay 31, 2019.The base was so shallow, it might also have been interpreted as a flat base. Shares surged 31% until the next base started forming in early September.
The flip side of bullish churn is heavy volume without further price progress. You'll see volume spike while the stock struggles to maintain upward momentum. Shares often will close low in the weekly price range. Treat this as a red flag, if not a sell signal.
A form of this characteristic is stalling in the major indexes, and it is found in daily rather than weekly charts. Stalling, a type of market distribution, happens when an index makes a small price gain in higher turnover but closes in the lower half of the day's price range.
This article was originally published June 26, 2020 and has been updated. Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia
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