Taking Profits, continued
Exhaustion Gaps
Some climax runs will end with an "exhaustion gap," which happens when a stock that has been advancing rapidly and is greatly extended from its base opens at a price above the prior day's highest level. This usually indicates the final stage of its move — one final burst of buying before a stock eases back. However, when this happens close to the breakout, it is called a breakaway gain, and it can actually be a sign of strength.
Qualcomm, JDS Uniphase, Veritas Software and other solid stocks of 1999 experienced this type of action.
Late-Stage Bases
As a stock advances, it builds several bases. The third or fourth
base, however, is more prone to a decline. This is common among
leading stocks. During the first base, the stock demonstrates
inherent strength, but few investors notice it. When the second base
forms, more investors notice it. By the time the third or fourth
base forms, however, almost everybody notices it, including most of
Wall Street as well as Main Street. That, oddly enough, is
historically the time when the stock is most likely to sputter. It
happens about 80% of the time, frequently in combination with a
decline in the overall market. If the stock rebounds after dropping
sharply and below the lowest price level of the failed, late-stage
base, a new base may later be formed. And you can in some cases
begin counting new bases all over again, after having undergone the
major shakeout.
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