What Is A Flat Base? Why Does It Generate Flashy Profits? Skechers Scored Big With One

What is a base? And what is a flat base?


For those who like growth stocks, knowing the answers and applying them in the portfolio can pay off brilliantly.

First, a base is a simple concept in the stock market. When a stock goes on a strong run, it needs a break. Holders who wish to sell do so. Buyers virtually disappear. But after the sellers get exhausted and an equilibrium between supply and demand returns, the stock stops falling hard. It bottoms out. Strong buyers come back in. They send the stock rising near their old highs.

The base reflects all of this action.

Good bases coexist with bad bases on Wall Street. The Investor’s Corner mission? To help you spot the good ones.

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A good base creates the setting for an outstanding breakout. That’s when the individual player gets in. If the market plays the bullish phase of its cycle, and the stock carries most or all of the CAN SLIM leadership aspects, then the flat base may engineer beautiful profits — fast.

Skechers USA (SKX) molded a six-week flat base starting with a peak at 39.07 on Jan. 12. You should insist that the flat base forms over at least five weeks, or 25 days on a daily chart. And, on a daily chart or weekly chart, you want to look for tight, sideways price action after a nifty run-up. Volume should dry up, a hint that investors are not selling with intensity.

Mathematically speaking, in a flat base the stock falls no more than 15% from the base’s high. Skechers dipped 13.5% from high to low.

Within the base, Skechers put tread marks all over its 50-day moving average. That’s considered bullish. And the week ended Feb. 5 imprinted a stunning reversal off the lows. The stock finished that week up 8% in big volume (1). That was pretty action ahead of the breakout, like a sunset viewed from the company’s Manhattan Beach, Calif., headquarters.

Skechers skidded after it first strode past the 39.17 buy point. Thin volume signified weak demand. You want the big boys and girls on Wall Street rushing to get into the stock. The only way to know? Check for volume to rise a minimum 40% vs. the average over the past 50 trading days. Depending on the circumstances, volume can even double or triple during the breakout day or week.

Big volume came in March 12 (up 29% vs. normal levels) and March 15 (up 84%). Shares shot almost 10% higher those two days, stepped back near the 39.16 buy point, then never looked back. Skechers sprinted 43% higher in less than five months.

Due to Covid-19, Skechers’ sales and profits lacked luster in late 2020. But in 2021, first-quarter earnings surged 84% on a 15% lift in sales. Q2 profit soared to 80 cents a share vs. a net loss of 48 cents a year earlier. Sales cruised 127% higher to $1.66 billion.

Please follow Chung on Twitter: @saitochung and @IBD_DChung


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