We frequently talk about bullish bases in MTM’s Group Coaching class, especially with the market moving higher for much of the year so far. But what does a bullish base look like and how can we use it for a potential bullish entry? Here’s a brief explanation of what a bullish base is and what to look for.

Bullish Base

I consider a bullish base to be when a stock moves considerably higher, usually over a short period of time, and then begins to trade sideways. If the stock does not pull back more than two-thirds of the move higher, it is a bullish base. For example, if a stock moves higher from $50 to $56, then trades sideways and never closes below $54 ((6 X 2/3) + 50), it has formed a bullish base. Many times, higher lows are made as well, but the stock has trouble moving over some resistance that has kept it from moving higher.

GOOGL Example

Take a look at the daily chart below of Alphabet Inc. (GOOGL) from April to the beginning of July.

The stock gapped up after earnings, pulled back around the $162 area and traded all the way just over the $180 level. It had trouble moving past the $185 level but never really traded much below the $181 level over the last week. The move was approximately $23 (185 – 162) but did not retreat much ($180 level), which means it easily held two-thirds of its run higher.

I put this stock on my bullish watch list and waited to see if it would move above the $185 level. For me that usually constitutes a 2-bar bullish close (2 consecutive bullish closes above resistance) on the daily chart. But the very next session, GOOGL broke higher through the $185 level as seen below. Being patient, we waited for a confirmation candle. As you can see below, at the time the screenshot was taken we had not gotten another bullish candle. Again, being patient, we waited to see if we would get a move higher the next day.

Final Thoughts

Determining what constitutes a bullish base is fairly easy from a technical standpoint if you know what to look for and consider. Just because it is a bullish base does not mean it will eventually move higher. As traders, we always want to put the odds on our side. And for me that would be a break above (2-bar) the resistance level of the base.

John Kmiecik, Market Taker Mentoring