Investor's Business Daily, April 25th, 2007
For nine seasons, the hit sitcom "Seinfeld" billed itself as a show about nothing. For stock-chart readers, some base patterns are about nothing too.
These price consolidations have no recognizable pattern. They are corrections without the shapes or price action common among winning stocks.
True, sometimes an amorphous formation can result in a breakout that brings the stock success. But more often, they go nowhere.
Many books on charting show dozens of patterns believed to presage price advances. In reality, few base types have been shown to deliver reliable, bullish results.
The most successful pattern -- proven over decades of market research -- is the cup-with-handle. In this base, a cup-shaped correction forms, followed by a shorter, shallower pullback that resembles the handle on a teacup.
There's also the double-bottom, in which the stock forms two distinct corrections. The second bottom starts developing before the stock makes a new high, and usually undercuts the first bottom.
Also look for cup patterns without handles, or flat bases that decline no more than 15%. Check the IBD Learning Center at investors.com for more on chart patterns.
If a base doesn't resemble any of these four types, it could be just another Seinfeld pattern, like the one Landstar System LSTR made in '06.
After a moderate advance, the stock pulled away from its highs. It made a series of declines followed by rally attempts (point 1). But it never settled into a coherent form.
Despite the oscillating action, the trucking company's shares made relatively slight daily price movements. That's considered positive.
Some chart watchers may have pegged Landstar as a reverse head-and-shoulders pattern. That's a formation you may read about in other publications. But it doesn't have a proven track record of success.
Landstar broke out July 3 (point 2) as it cleared the March-to-June consolidation. But volume was soft on the breakout (point 3), demonstrating weakness just as it reached a significant new level.
The stock immediately faltered. Nine straight days of selling took it below its buy point 14d into another long period in which it made no progress. The combination of a poor base and a weak breakout should have told investors the risk in buying the stock was too great. The market was in a correction at the time, which added to the risk.
