What Does a Bullish Base Look Like?

Posted on Wednesday, May 6, 2020 at 2:51 PM

I talk about bullish bases in group coaching class practically every day. The market has been predominantly bullish, but what does a bullish base look like and how can we use it for a potential bullish entry? Here is a short blog explaining what it is and what to look for.

A bullish base forms when a stock moves considerably higher, usually over a short period of time, and then begins to trade sideways. To me, the question becomes, what is sideways? If the stock does not pull back more than two-thirds of the move higher, it is a bullish base. For example, if a stock moved higher from $50 to $56 and then traded sideways and never closed below $54 (6 X 2/3), it has formed a bullish base. But at the same time, the stock is stuck under some resistance that it has had trouble trading above.

Take a look at this recent example of Tesla Inc. (TSLA) on an hourly chart below.

The stock rallied from just above the $450 area and traded all the way to previous resistance around the $545 level. Looking in late March, the $545 area produced a bullish base too, but the stock was not able to clear resistance. Not all bullish bases move higher. But in early April, it rallied to that same area and did not pull back more than a third of the move higher. In this case, it barely pulled back. Fast forward and take a look what happened to TSLA about a week later.

The stock exploded to the upside once the resistance level was toppled. Big moves like this are not common but can clearly happen in the right environment. I put this stock on my bullish watch list but did nothing (bullish directionally) until it broke the resistance level. For me that constitutes a 2-bar bullish close (2 consecutive bullish closes above resistance) on the daily chart. But at the same time, selling put credit spreads below the support level could have been considered as well.

Determining what a bullish base is can be fairly easy if you know what to look for and consider. Just because it is a bullish base does not mean it will eventually move higher. Resistance like support still has a better chance to keep the stock from moving higher. As traders we always want to put the odds on our side, and for me that would be a break above the resistance level particularly when it forms a bullish base.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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