When scouting for excellent base patterns, focus on those that have more up weeks in heavy volume than down weeks in above-average trade. If that's the case, buyers are in control, not sellers.
A stock's price action is important, but a move means a lot more when it's accompanied by big volume. This combination can give you clues about the future direction of a stock.
CAN SLIM investing involves identifying stocks being scooped up by the big money. So focus on stocks in bases with more up weeks in high turnover than down weeks in big volume. They're the ones being accumulated by professional investors, such as mutual funds, banks, insurers and hedge funds.
On the flip side, bases with more down weeks in big turnover than up weeks tell you that they're under distribution, or being sold heavily by institutions.
Professionals don't always buy at new highs. Some do their shopping during consolidation periods, which create various chart patterns.
Institutions will take weeks or months to build a full position into a stock. Their buying leaves footprints in the form of tall volume bars.
Use an IBD or MarketSmith chart to spot the work of professionals; check to see if a volume bar spikes above the moving average line, colored in black. Flip through each week's worth of action in a base and tally the up weeks in above-average trade and down weeks in heavy trade.
One caveat is that a down week in above-average trade on the base's left side doesn't always equal distribution. If the stock closes in the top 60% of the week's trading range, the action is considered accumulation.
From December 2010 to February 2011, Herbalife (HLF) shaped an 11-week consolidation that showed net accumulation. It had just one down week in heavy volume (1) and three up weeks in above-average trade (2), signifying robust demand.
The nutritional supplements seller cleared a 35.75 buy point in huge volume in the week ended Feb. 25 (3) and surged 71% by July before pulling back to its 10-week line.
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