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Published byEdmund Reynolds Modified over 8 years ago
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Counting Bases Mike Scott
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Base Counting and Price Target Setting
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Preferred Stocks to Own Liquidity: Average Volume * Price > $20M-$40M+ per day –Minimum price $15 (NYSE), $20 (NASDQ) Top notch fundamentals –Triple-digit EPS gains– 3 quarters of EPS acceleration –3 Quarters of Sales acceleration –3 Quarters of increasing Institutional Sponsorship –1%-3+% Demand-Supply Ratio –ROE + Pre-Tax Margin > 50% Satisfactory responses to three questions: –Is this the very best stock I could own? –Is this stock sponsored by quality institutions? –Where is the stock in its cycle (base stage, earnings date)
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Why Count Bases After a stock moves up they typically consolidate (base) for weeks or months before they make another move New investors are required to keep a stock rising By the time a growth stock forms its third or later stage base it is known by most investors At some time we run out of sufficient new buyers to continue the advance
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Evolution of a Stock Cycle Bear Market Decline “3-Waves Down” Successful test of low 1 st Stage Base Prior Rise > 20% 3rd Stage Base 2nd Stage Base 4 th Stage Base A A a b c
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Bear Market Decline a b c Positive Test 1 3 4 2 5 General Market Follows Through
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Count bases on a weekly chart Bases begin on the first down week of a consolidation pattern The base continues until the price breaks out of a legal buy point (pivot point) Only count bases that are long enough 1 9
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Base Counting Rules Start the base count when the stock is investment grade. Typically when the top of a base forms above $10, makes profit and demonstrates clear demand. Artistic license okay. Count each base that forms 20-30% or more above a prior base (buy point to top of next base) Count bases of 7 weeks or longer (there are exceptions such as 5+ week flat base that gets deeply undercut) A bear market resets the count for all stocks after the market begins the next bull market Any undercut of a prior base resets the count A stock that breaks out and fails below the bottom of its base resets the count A 2/3 decline from a prior high resets the count A base of 12 months or longer resets the count The first base that forms after count has been reset is first stage
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MA Tops at $320 after 4 th Stage Base O’Neil Studies have shown that big leaders tend to expand P/E from a 1 st stage base by 130% before topping PE = 46 +155% 18-months to 2 years typical
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Pay Attention to the First base in a New Bull Market For P/E Expansion Price Target Calculations only consider the first base in a new bull market The last bear market bottom was 3/09/2009 In rare cases a leading stock will breakout of a 1 st stage base in advance of a bear market low (BIDU, NFLX)
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Base Counting Example 1 st > $10 Obvious Institutional Sponsorship Tops at $72 with a failed 4 th stage base 2
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Bear Market Decline a b c Positive Test Bull Market Starts Should we start here or here?
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NFLX Base Count 4 or 5? 1/28/09 eIBD
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What is VIT Base Count?
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Volume Discovery! < $10! VIT 1% above PT
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What is the Current Base Count?
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Base Undercut Reset Breakout and undercut
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LULU Resets the Count Current 2011 EPS est. is 1.57, I don’t chase moving estimate targets
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Breakout Failure Reset Breakout Fails below base First Stage Base
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Long Base Reset
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Setting Price Targets Experience has shown that small and mid cap leadership stocks tend to top after the P/E ratio has expanded on average 130% from its original first stage base Large Cap stocks tend to top after the P/E expands 98% P/E expansion is effective for setting working targets based on extensive historical studies of winning stocks Use this as a possible means to stay in a position when a stock is making its early moves and not sell out too early P/E expansion is useful to amplify sell rules: stock approaches sell target and is showing weakness
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Price Target Algebra 130% expansion and high school algebra… –P/E = 10; 1 st stage –Expanded P/E = 10 + 130% of 10 –Expanded P/E = 10 + 1.3 * 10 = 10 * (1 +1.3) –Expanded P/E = 10 * 2.3 = 23 –Use 1.98 for non-growth stocks…
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P/E Expansion Method Step 1 Determine the Target P/E Target P/E = P/E @ Pivot * 2.3 Original first-stage base only, institutional grade stocks only (if non-growth use 1.98) If later stage, estimate initial P/E at 1 st stage breakout by using the sum of the trailing four quarters of earnings (T EPS ) at the time of the initial breakout: P/E at Pivot = 1 st Stage Pivot Price / T EPS Step 2 Identify estimated earnings per share 18-months to 2 years out (MarketSmith) Step 3 Determine Price Target Multiply Target P/E by estimated Earnings
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NFLX Base Count 4 or 5? 1/28/09 eIBD EPS est. 18-months to 2 years from 1 st stage base breakout (earlier est. was 4.39
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Step 1. 1 st Stage Pivot = $9.98 P/E = 9.98/0.98=10.2 Bear Market reset EPS TTM = 0.98 Step 2. EPS + 2 years = 1.67 Step 3. Price Target = 1.67 * 1.98 * 10.2 = 33.7 Not a growth stock, use 98% (1.98) expansion factor Can you hold here? 3-Waves Down
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GMCR has not achieved PT Tight Closes If market allows GMCR has room to run
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FFIV Climax Top +7% above PT
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FFIV Short Position
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