Accumulation-Distribution counting in bases

Earlier today in the VIT forum I mentioned a stock REGN that showed more high volume sell off weeks in its base than high volume up weeks. The attached chart and procedure below shows a simple base counting technique taught by Bill O'Neil in seminars. A recent confirmation study has been performed analyzing 433 base breakouts from 2003 through 2007. The stocks came from the IBD 100 lists of the period. The conclusion of the study shows that bases showing a non-negative net A-D count had 3-times greater success rate of achieving 22.5% gains before seeing a 7.5% loss than bases exhibiting a negative A-D count.

There are very few "triple" odds in investing and thus I avoid stocks showing negative net A-D counts.

The net counting procedure is as follows:
1. On a weekly chart find every tall volume bar inside of the base under study showing above average volume (10-week average volume)
2. Assign a +1 value to each tall blue bar (positive close)
3. Assign a -1 value to each tall red bar that closes in the lower 40% of the bar's range
4. Don't count support bars: tall red bars that close in the upper 60% of the bar's range. These are positive signs in a base.
5. Sum the +1 and -1 values to produce a weekly chart net count.
6. Do the same procedure on a daily chart using 50-day average volume
7. Sum the values from 5 and 6 to produce a net A-D count.

A base starts on the first down week (day) after a closing high on the left side of the base. Count each tall bar until the breakout. The breakout week (day) is not included in the count. MarketSmith has a feature if you have the optional pattern recognition feature enabled. The cursor shows the percent closing range of any bar. This was added to enable easier bar counting. Before I had this feature I had to inspect visually close calls using a calculator and the following formula: % closing range = 100*(C-L)/(H-L)

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Thanks Mike. How do you treat the handle in these examples? I know they should be quiet but it's not always the case.

[QUOTE=barbados11;25262]Thanks Mike. How do you treat the handle in these examples? I know they should be quiet but it's not always the case.[/QUOTE]

I include the handle in the count. Yes it is possibly a flaw if there is a lot of high volume trading in the handle. We look for volume to dry up at the bottom of the base as well as at the bottom of the handle. This does not mean that there cannot be some energetic trading shown in individual bars.

Essentially a cup with handle or flat base formation is a pattern that wears out weak holders of the stock. They sell and move on. A volume dry up at the bottom of patterns is evidence that the weak holders have become exhausted and the remaining holders are committed to the longer term and less likely to sell into a breakout.

The double bottom pattern exhibits a different mechanism to remove weak holders. The double bottom by undercutting the first low in the pattern shakes out the weak holders.