“Jackson Wong stated early in his extensive review at the end of last year: Buying long-term base breakouts is one of the best technical strategies. Aside from the list of usual suspects (dividend aristocrats, autonomies) what else do you see out there these days breaking out of long term bases? I have noticed one called GN Store Nord (Denmark) but it does not trade here in the U.S. Another I have noticed is CME group. The former is moving and the latter seems poised. Do you recommend as a long term investor to buy these breakouts markets be damned or is it more sensible to add breakouts to a list and then wait for overall market weakness?
“All my best from the U.S.”
Eoin Treacy's view Thank you for this question which others may also have an interest in. At one of the first Chart Seminars I taught, a delegate asked me what the most reliable continuation pattern is. It is a subject I've given a great deal of thought to over the intervening years.
As David has often said “a consistent trend is a trend in motion” Therefore, once we identify a market that is trending consistently, we can expect the pattern to continue to unfold as it has done until something happens to change it.
Base formation completion is another reliable continuation pattern. As you will remember from The Chart Seminar, in order for a breakout to occur, a vacuum of supply above the market must first develop. This is why we refer to bases as explosions waiting to happen. When a market has been ranging for a prolonged period, interest decreases and the leveraged players move on to more exciting venues. The most promising markets from an investment perspective are those that are in the latter stages of base formation completion, possess a fundamentally sound argument for participation but that have not yet gained popularity with the wider crowd or media.
GN Store Nord has rebounded particularly impressively from its 2009 nadir and hit a near 10-year high last week. While somewhat overbought in the short-term a sustained move below the 200-day MA would be required to question medium-term upside potential. Considering the extent of the range and the fact that prices have already multiplied on successive occasions, I'm not sure we can consider this base formation completion since it has been in a bull market for more than three years already.
CME Group has more of the characteristics that we association with base formation. The share has been ranging between $45 and $70 since 2009 and is currently testing the psychological $60 area. A break above that level would suggest a return to medium-term demand dominance. If we apply commonality, the impressive breakouts experienced by other exchanges such as the LSE, Intercontinental Exchange, Nasdaq etc. increase the potential that the CME will follow suit.
The consumer sector represented perhaps the most important breakouts of 2012 as a large number of shares completed more than decade long bases. The industrial and manufacturing sectors have since begun to attract investor interest, spurred by the USA's competitive energy costs, industrial automation and a recovering global economy.
3M, Honeywell, Leggett Platt, Illinois Tool Works and Berkshire Hathaway might be somewhat overbought in the short-term but the benefit of the doubt can be given to the upside provided they find support in the region of their respective 200-day MAs on pullbacks.
From an investment perspective, when identify a breakout, we need to measure the size of the position relative to the potential drawdown if it reverts to the mean. One strategy would be to have an initial position and add to it on a pullback.