Proper base formation

[Harry]

Hi Mike,

Cups & Cups-w-handles require 7 week formations.

In looking at three very similar stocks with similar patterns: SWKS, NXPI and AVGO - SWKS's base is considered too deep and flawed. This is b/c SWKS base is only 5 weeks whereas the other two have longer bases, correct? NXPI breaks above the high set on the left side of the base during the 7th week of the base (assume that meets 7 week criteria?) and AVGO's base is even longer. Otherwise the chart patterns look identical.

Harry

[Mike]

Harry,

SWKS has had a V shaped correction of 26%. We prefer cup shaped bases to be rounded. 26% is not too deep however it is too short being less than 7 weeks. Buying the breakout on 11/3 would have been too risky for my taste. The 26% drop did undercut the preceding ascending base making SWKS now a first stage base. If a proper moving average bounce with volume occurred I might be interested.

NXPI also undercut its prior base making the current base first stage. I count the base as 6 weeks. A base count starts on the first down week on the left side and continues but does not include the breakout week. Last week was the breakout week. Six weeks can work sometimes but it is shorter than desired. At the beginning of a new bull market is when to consider short bases, not the end. Its base is also V shaped and therefore failure prone. The breakout on 11/6 seems to have been met by selling.

AVGO's current base is 8 weeks long and also V shaped. I would call AVGO a cup with handle. AVGO has two distribution weeks in its base and only one accumulation week, not favorable. AVGO has not reset its base count and is a third stage base.

All of these bases have a V shaped pattern as that is what the market did. Contrast this with BABA, YY, BIDU and PII which had a more rounded shape pullback and MNST and HBI which barely pulled back at all. This action is what you should prefer.

[Harry]

Thanks (as always) Mike.

Harry