The Ascending Base Pattern and an AI Super Breakout

Posted January 20, 2024

The ascending base pattern, a pattern similar to the 3 rising valleys pattern, is one of the most bullish chart patterns in swing trading.

We just nailed the biggest trade of the year thusfar on an AI stock in this very bullish chart pattern.

The mainstream financial media would have you believe that the stocks that did well last year are doomed to underperform this year. Its actually just the opposite.

The long-term trend in a stock and theme is very powerful. In trading we want to harness this trend to profit while managing risk and this blog post is all about how we do it.

The Ascending Base Pattern

The ascending base patter is a chart pattern where you have 3 higher swing lows with 3 higher swing highs on a chart usually over about 2 to 4 months. The 3 swing lows roughly line up where you can draw a line connecting the 3 lows in the pattern. Each pullback in the pattern is usually about 10% to 20% but can be more or less.

As with other chart patterns, the best ones are close to all-time highs so if it reaches the entry point in the pattern, there is little overhead resistance. Patterns where the entry point is within about 30% of the highs are usually better than those closer to the 52-week lows.

The entry point is either a break above the third high or after the first pullback (after the initial breakout) and break into new highs again. We also often look for a break of the short-term downtrend resistance in the second pullback in the pattern to get long with fresh bullish news within a channel that is now confirmed.

One of the most important ingredients in this and other chart patterns is a strong catalyst just before the entry point. A catalyst that is much stronger than expected.

In the case of SMCI last week, this is exactly what we received. One of the more impressive pre-announcements this quarter.

We also have multiple bullish chart patterns with the larger, choppy rounding bottom pattern started in August.

Charts courtesy of StockCharts.com

The Importance of a Great Stock to Begin With

We first featured SMCI, an AI stock, to customers in early 2023 before a massive run. Each time it formed a bullish consolidation and reached a good technical entry point early in the year, it held a very tight stop-loss below the technical entry point listed in the daily alert and ran much further.

Holding a tight stop below a great technical entry point is a hallmark of big winners in our experience.

Later last summer, however, it was clear that margins were eroding over time. We would rather see a fast growing company expand their margins as they achieve economies of scale.

After reaching our price target out of a high tight flag during the summer, SMCI was moving in the opposite direction in terms of their margins which led to a long, frustrating consolidation for many traders. Earnings growth looked to be slowing going forward.

Thursday night, however, the company pre-announced an incredible beat on the top and bottom-line. A whopping 30% sales beat and big earnings beat as well.

This refutes the slowing growth thesis for now with AI mentioned a bajillion times at this years CES key commentary from tech leaders. Also, NVDA just generated a beautiful breakout after we featured it in December. The chart patterns we saw ahead of that breakout are covered in the last blog post on the saucer with handle pattern.

DT, another AI related stock recently featured in the daily alert, was off to a nice start as well from a good technical entry point.

Great stocks to trade tend to be in leading industries at the time. If the theme is still strong with a good growth runway in the years ahead, why abandon it for low quality stocks with little growth?

So look past the Dow stocks and penny stocks and focus on the high quality growth names with patterns like these in hot industries for more exciting potential when swing trading.

The Importance of a Great Entry Point

As with NVDA, SMCI reached the entry point with a fresh catalyst, broke out of a bullish base formation right after, and held a very tight stop-loss below the technical entry point. For those reading our blog posts over the years should hopefully see the pattern at this point.

There are lots of stocks forming this and other bullish base patterns. A lot of them will reach the technical entry point without the strong long-term trend to begin with. Also, many stocks will just not have a strong catalyst right before the breakout.

Betting on a big catalyst is a gamble. Its like buying ahead of earnings. Maybe it works out and maybe it does not. Back in the day, people could share insider information without everything being recorded, filmed and tracked. This is no longer the world we live in. So assuming that all the big money knows what the news will be and you have to buy ahead of the news is just not true.

SMCI and NVDA are good examples of why sometimes the news is widely known only after its released.

So take a chance on going against some of the conventional advice out there. Consider trades after a big catalyst as long as the news is much better than expected and its an investable stock. Just be sure to get in within about 1.5% of the technical entry point which means you need to do the pre-market preparation each day and have a great watch list.

The Difference Between Investable and Not so Investable Stocks

SMCI also met the rules in the earnings eruptions strategy. Our optimized approach of trading the largest earnings gaps on the best stocks.

SMCI soared 20% from the entry point taught in the course within a few hours while not going more than 1% below the technical entry point after it was reached. So it held a 1% stop-loss after entering the trade using the earnings eruptions strategy to qualify and trade these monster earnings gaps.

When you have news like this shorts have to run to cover. Multiple funds are starting or adding to a position. Word spreads and retail traders rush in to grab some shares.

Its a buying frenzy right after the big news.

Because its not a pump and dump penny stock, large institutions are flocking to buy for the longer-term. They often keep buying for days or weeks afterwards because its an investable stock in a bull market with growth.

Targets and Stop for the Ascending Base Pattern

3 rising valleys patterns and ascending base patterns often lead to parabolic moves on growth stocks or undervalued value stocks that are heading towards better days.

So a good exit point may be waiting for a parabolic formation to develop and raise your stop below the prior days low. Or, wait for a close below the 9 day exponential moving average.

With a more gradual move higher, you could wait for the first test of the 9 EMA and then sell into the next rebound on a break to new highs again. If its going to continue, the stock will likely offer other good technical entry points such as the next strong base pattern on a weekly chart which should take several more weeks to develop after it reaches its apex.

In the case of SMCI, the company is likely to beat the numbers they pre-announced. Why raise revenue guidance by 30% and not beat that guidance? That would not be a great move ahead of the earnings report. Also, you could have a much increased outlook for next year in the earnings report or conference call.

So you could also sell some of your shares after the earnings report.

But 15% to 20% in one day is already a great swing trade. So we took some profits and raised our stop on the remainder to ensure a profit overall. The stock tends to continue for days or weeks after a big earnings beat like this but you need to develop a discipline to ensure a big profit does not turn into a loss when swing trading.

There will be plenty of other big swing trading opportunities as earnings season really heats up next week.

In Summary

This is one of our favorite swing trading strategies after trading for many years and thousands of live trades. A long-term uptrend, bullish consolidation and then good technical entry point reached with great news on a great stock with growth or an undervalued value stock with great news in a bullish technical pattern.

The 3 rising valley pattern or ascending base pattern is a little more rare bullish consolidation pattern but they do come up and often lead to a parabolic move if the news is really good especially. A great stock with growth, strong uptrend leading into the pattern and a big catalyst are keys to success in our opinion on stocks near the highs as we saw with SMCI when we featured it again Thursday evening in the daily alert.

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