Stocks that have large price gains typically will stair-step upward and form Flat Bases before resuming their up trend. This action may occur several times as a stock remains in an up trend and could last from a few days to several weeks depending on the situation. Flat Bases are characterized by small daily trading ranges with volume being lower than normal. Although it doesn’t happen every time, the longer a stock remains in a Flat Base, the greater the price appreciation may be when the stock breaks out. Lets look at some examples below.
Here is a chart of EMLX. Notice how it formed a Flat Base (small trading range) from July through mid-August and then broke out of the base in on increasing volume (point A). It then formed another Flat Base in September and broke out of this base in early October and skyrocketed from $80 to $200.
Another example of a stock that had a few Flat Bases was KIDE. Notice in May and June the small daily trading ranges with low volume. Then in early July the stock broke out with increasing volume (point A) and went from $10 to $30 by mid-August. KIDE then formed another Flat Base from mid-August though early October and then exploded out of the base on higher volume (point B). The stock then went from $30 to $90 in four weeks. The total gain from July to November was 800% ($10 to $90).
Another example of a stock that was in a Flat Base pattern for a significant amount of time was MCOM. Notice that it traded sideways for at least 3 months before breaking out of the base on strong volume (point A). In this case MCOM went from $10 to $55 in 4 weeks for a gain of 450%.
As you can see, finding stocks that exhibit certain chart patterns (Cup and Handle, Double Bottom and Flat Base) can lead to strong price appreciation when they breakout on strong volume.
This pattern occurs when a stock rises very quickly out of a base and gets overextended. Stocks in a Parabolic Move can double or triple in value in a very short period of time (usually less than two weeks). As an investor you certainly don’t want to be one of the last passengers on the train and get quickly thrown off. Some examples of this pattern are shown below.
Notice the quick move upward in MCOM back in July. In 5 trading days it went from $20 to $57 for a gain of 185%. Also notice that on the biggest volume day (point A) that it gapped up strongly to $53 and then closed poorly around $41. This was the Climax Top Off the Parabolic Move. As an investor you should have sold this day if you had bought the stock in the $20’s. Meanwhile you certainly should have not bought this stock this day. Notice how the stock eventually pulled all the way back to $20 by early August (point B).
Another example of a Climax Top Off a Parabolic Move is demonstrated by LWIN. This stock skyrocketed from $30 to $95 in 10 trading days for a whopping gain of 217%. The Climax Top occurred on the 10th and 11th days of trading as the volume peaked (point A). The stock then sold off and retreated back quickly to around $42 by late November.
As you can see stocks that go up very quickly, in a Parabolic Move, can also come down just as fast. My advice is if you buy a stock and it doubles or triples in value in a very short period of time (1 to 2 weeks) take your profits and congratulate yourself for a job well done. If you become greedy then you could lose most of your gains as the above examples indicate. Furthermore if your buying a stock in this type of move be very careful and watch out for the Climax Top if the stock is trading on its biggest volume day.