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Is that a cup-with-handle base or a double bottom?
If you're ever struggling to analyze a stock chart pattern, keep in mind that some things need to be present in every base for it to be a proper consolidation.
It doesn't matter how you interpret a pattern if its price-and-volume action isn't up to snuff. If it's lacking in this area, just move along to another stock chart.
Here are a few key factors to look for, whether you've spotted a saucer, a flat base or any other classic base:
• Accumulation. You want to see more up weeks in heavy volume, also known as accumulation, than down weeks in strong trade, called distribution.
Check out Radware's (RDWR) cup-with-handle base last year, for example. Radware, an Israeli maker of Web traffic management systems, rose the week of July 23 in above-average volume 1.
There is some nuance to spotting accumulation in weekly charts.
Namely, if a stock closes in the upper 60% of its trading range for the week, even if it was a down week, you still consider that accumulation. It's viewed as institutional buying because the stock has shown some strength by finishing well off its low for the week.
• Light trade at lows. You also want to see weak turnover as a stock shapes the bottom of its base.
Radware largely fit the bill in this regard. Turnover was above average in the week ended May 7, but it was then soft for the next three weeks 2, including in the week ended May 28, when the stock hit its low of 17.53.
• Tight trade. Another desirable trait is calm action, meaning no wide and loose price movements.
That's always encouraging to see in any base. Radware comes up rather short in this respect.
Overall, the base had more swings than you would prefer to see. But you can't expect every consolidation to be flawless.
Radware had a number of positive characteristics that outweighed some of the not-so-tight trade in its cup with handle. It ended up clearing its 24.10 handle buy point in the week ended Aug. 27 and advancing as much as 79%.
• Closes near highs. Another desirable trait is price closes near the top of the range.
Radware's base had several weeks of such positive price action. The weeks ended May 28 3, June 18 4 and July 16 and 23 saw the stock close within 25% of the week's peak.
• Light volume in the handle. For bases that form handles, it's best to see volume dry up in the handle. This tells you that the stock is going through a normal shakeout, not a major sell-off by institutional investors. Of course, make sure the volume swells when the stock breaks out past its buy point.