One of my favorite charts at the moment is a cyber security stock called Proofpoint (TICKER: PFPT).  What I like about it is this base on base pattern is has formed.

pfpt

This thing broke out of a 8-9 month consolidation with a large volume footprint.

However, instead of working higher it’s formed another consolidation in what is known as a base on base pattern.

The base on base pattern is great for a couple of reasons.  First, the classic technical rule coined by many, including Louise Yamada ‘the bigger the base the higher in space’.  The longer the stock consolidates, the more power an eventual breakout has.

I think there is some magic in the stock stalling out on top of it’s prior base as well.  Psychologically it emboldens bears who are trying to short because they extrapolate that the rally is going to fail miserably because it has stopped.  In short bears think they are right, when in reality their positions are most likely red.

My favorite recent example of a base on base pattern is IPG Photonics (TICKER: IPGP).  It’s a much larger pattern, but shows the power of this pattern clearly.

After breaking out of the second base in late January, IPGP has rallied 60% in a smooth trending fashion.

ipgp

If Proofpoint can break above this second base, it could see a similar move on a smaller scale.


Now that you’re all excited, it’s worth remembering that there are no guarantees in markets.

If this thing breaks below 83 or the 200 day moving average at 81 and holds below them, you can’t be afraid to throw the idea out immediately.

It’s also worth noting that there is immediate resistance at 90.  It doesn’t matter what we think will happen, it’s never a good idea to buy at a proven resistance area.  If this thing gets over 94, then we’ll be talking about it more.

Trade em well.