Sunday, November 26, 2006

The "Base and Explode" pattern

This pattern is easily recognizable, and the name for this pattern was first coined by the guys at High ChartPatterns. Essentially, the "base and explode" is when a tsunami of buyers simply overwhelm the sellers. The tsunami is a the appropriate analogy here - the sellers are completely, and utterly overwhelmed EVERYWHERE, and it is sustained for at least a good few candles. That is also what makes this pattern a high-probability chart pattern. The stock price goes vertical, and only starts to level off when the tsunami of buying panic recedes.

Here are a couple of examples which illustrate this pattern:
My daytrade of ICE call options was also an example of the Base and explode pattern.

Characteristics of the "Base and Explode" pattern:

1. There is a series of low volume, narrow range candles just before the extreme volume for the duration of the vertical price spike.
2. The stock almost always establishes a new support level when all is said and done.
3. Often occurs in the direction of the pre-existing prevailing trend.
4. The best way to describe the price-action during this base and explode is: vertical. Not only does the price go vertical, but the Ask goes vertical, and even the Bid goes vertical, often in unison.
5. Think of a person quickly climbing up a 30ft ladder, and that is similar to what "base and explode" will look like in a real-time chart.

The main difference between the "base and explode" and the breakout pattern is that a pre-defined resistance level is not required for a base and explode. Also, breakouts follow a normal up and down movement, and follow the ebb and flow of the sector/market. Base and explode does not. It is singular and precise in its action, and that is vertical.

Because it is hard to know when the tsunami of buyers will recede, the best way to play a "Base and Explode" pattern and the lowest risk entry point, is to be at the right place at the right time - and that is at the start of the explosion. This basically implies that you have to be stalking a stock ahead of time, and have your trap set (by way of a price event alert). You have to be ready to act quick.

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