So there’s something called base count.
In stage 2, a stock climbs up the price action then experiences some profit booking which pulls the price down. The price pull back is between 15% to 35% percent, following which the price then comes back to prior levels and climbs further from there. This would create a cup like structure.
A climb of a minimum of 25% from there and a repeat of the aforementioned scenario create a base. Going by the description we now have 2 bases.
When we have 4-5 such bases, it is said that the stock becomes exhausted and prone to breakdown. This is when you need to become cautious. I searched, but:
- Stan Weinstein does not mention anything about base count, but does mention eyeballing the chart in general to check if a stock is in late stage 2. Here’s a pictorial representation:
- William O’ Neil does not mention anything about base counting in his book – HOW TO MAKE MONEY IN STOCKS, but his firm William O’ Neil India’s product – MarketSmith has an article on base counting – Base Counting.
- Mark Minirvini in his book – Trade Like a Stock Market Wizard does mention about base counting in chapter 5 on page 80 but does not elaborate on how to do it. Here’s an image of base counting per Mark:
So, all in all, per my knowledge, your best bet at the moment when it comes to putting sell stop orders is concerned is, to count bases per MarketSmith article, while taking sector rotation into account.
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