Mastering Base-on-Base Formations After an Earnings Gap

This article explores the effective base-on-base chart pattern that can form after a major earnings gap. This pattern signifies strong institutional accumulation and can lead to some of the most explosive breakouts.

Entry Rules

• The First Base: After the earnings gap, the stock forms an initial base of at least 10-15 days.
• The Second Base: The stock then forms a second, tighter, and shallower base on top of the first one. The second base should be at least 5-7 days long.
• The Breakout: The entry is triggered on a breakout above the high of the second base on a surge in volume.

Exit Rules

• Profit Taking: Due to the power of this pattern, aim for a higher initial profit target, such as 4R or 5R.
• Trailing Stop: Use a faster moving average, like the 10-day EMA, as a trailing stop to capture the majority of the move.

Profit Targets

• Measured Move: A measured move target can be calculated by adding the height of both bases to the breakout point.

Stop Loss Placement

• Place your initial stop loss below the low of the second base.

Position Sizing

• Given the higher probability of this setup, you might consider a slightly larger position size, such as 1.5% of your account, but never exceed your maximum risk per trade.

Risk Management

• The main risk is a pattern failure, where the stock breaks down through both bases. A tight stop loss is essential.

Trade Management

• Patience is key. Allow the pattern to fully develop before entering. Once in the trade, be prepared for a rapid and sustained move.

Psychology

• The base-on-base pattern requires patience and discipline. Avoid the temptation to enter prematurely.