The Saucer Base: This Bank Stock’s Base Was Valid, But Formed At A Geological Pace

Like any other stocks, a bank stock that falls into a long decline tends to eventually rise and emerge as a new market leader. When it does, investors are looking for ways to buy into the recovery.

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Investor’s Business Daily’s discussion of CAN SLIM strategies largely involves chart patterns that range from as few as five weeks to several months. Company turnarounds and industry cycles tend to take longer than this. As a result, some base patterns can stretch into months and years.

A saucer base is a chart pattern that sometimes forms in just a few months. Mastercard‘s (MA) action in April to September of 2016 is one good example.

But this base often requires one or two years to mature. This kind of “geological pace” seriously tests the attention span of modern investors, many of whom seek constant motion, or otherwise move on.

Saucer bases are sometimes shallow, even below the 15% level that determines a flat base. But they tend to always appear shallow. This is due to their length. A cup base that is 35% deep and eight weeks long can look quite severe.

But spread that 35% correction out over a year, and it looks like a saucer, not a cup.

Bank Stocks Lag Before Election

JPMorgan Chase (JPM) dug a saucer base that was 29% deep between April 2015 and November 2016. Investors may alternately read the chart as a base formed between November 2015 and November 2016. Either reading is valid. And the ultimate breakout cleared both of those buy points in a single swoop.

The S&P 500 notched a high in May 2015, then slipped into a long double-dip consolidation. This included the late August 2015 sell-off, begun in China, which wiped an estimated $2.1 trillion from U.S. stock markets in a six-day sell off. The index finally recovered to retake its May 2015 high in July 2016.

Banks followed a slightly different timeline. JPMorgan chalked up its high in late July 2015. It quickly recovered from the late August sell-off. The bank was working its way through four quarters of earnings declines and weak revenue when it was hit again by powerful selling in January 2016. JPMorgan settled into a gradual uptrend, although bank stocks remained generally depressed ahead of what markets expected to be a Hillary Clinton presidency.

That uptrend formed the right side of JPMorgan’s 15-month saucer base.

Beware Of Premature Breakouts

Because saucer bases tend to be long, there is a good deal of action that goes on within them. JP Morgan, for instance, formed a valid nine-week cup-with-handle base in June and July of 2016. It cleared the buy point of that handle on Aug. 4, 2016. Chart-wise, that may have been a valid breakout. But volume did not reach the 40%-above-average you’d like to see in a breakout. In addition, the bank had reported a gain of only 1% gain in its second quarter, even though that marked its first profit gain in five quarters.

The stock barely lost ground, remaining sloggy through October, ahead of the presidential election. However, by this time, the company had reported a powerful 20% rise in Q3 earnings and a recovery to 10% revenue growth.

On Nov. 9, bank stocks stepped into a leadership role as the market rallied on election results. JPMorgan broke out past potential buy points at 69.13 (1) and 70.71 (not seen on the accompanying chart). It also cleared the tops of handles that formed on the right side of the saucer. The stock was immediately extended, posting a 13% gain for the week and rallying more than 30% over the next three months.

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