Which Is Better: Tight Or Loose Base Formations?

The market tried to rally this morning but it turned into a fizzle by the end of the day.  High oil prices were taking the blame on tv.  The “why” doesn’t matter much to me.  What matters is that the market is losing momentum.  So far, though, no real damage.  Therefore, I would continue to focus on the long side.  I’m still seeing a good amount of setups out there along with some successes.

I recently had an email from someone who wanted to know what I thought of the merits of tight vs. loose base formations.  Most breakout traders tend to favor tight basing formations, yet I’ve never found them to have an advantage from a success rate or explosiveness standpoint.  To me it’s like asking, would you rather buy a Cup and Handle or Double Bottom?  Doesn’t matter.  What does matter is that the trade may be entered with reasonable risk.  The reason so many traders prefer tight basing patterns or tight handles is that it makes it easier to control your risk if you are able to use a relatively tight stop below the handle or bottom of the base.  Traders who have been reading this column for a while should understand that there are many ways to enter a breakout, beyond just trying to buy when the stock hits a new high

Early entries, intraday support stops, and waiting for a 1^st pullback are some of the techniques I’ve discussed and will continue to discuss that can help you to control your risk.  When using these types of techniques, you will not need to be nearly as concerned about whether the basing formation is loose or tight.  Loose bases can be just as explosive and rewarding as tight ones - the trick is being able to manage your risk properly.

Sector Watch

Technology, especially internet has pulled back the most in the last week.  Should the market decide to rally, this area may have the most snap-back power.

Energy seems to be getting a bit overdone.  I’d be looking to take some off the table here.  IYE has now made higher highs 11 days in a row, and IGE 9 days in a row.  Probably about time for a break.

Best of luck with your trading,

Rob
robhanna@comcast.net

P.S. Click here for the Hanna ETF Money Flow System.