How To Tell If A Growth Stock’s Run Is Getting Too Old

Just like humans, stocks have a life expectancy — not how long a company will be in business, but how long its stock run will last.

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Investors can tell the age of a stock advance by counting the number of bases in its chart. Typically, growth stocks make long-term advances that last roughly two years, usually ending with a bear market or market correction. Along the way, stocks typically form three or four bases: price consolidations that mainly last seven weeks or longer.

Starting from the bottom of the run, the first two bases historically have afforded the best gains. The odds of a stock running to new highs are highest from these first- and second-stage patterns. Often, stocks find themselves in the initial phases of innovation or investor discovery at this time, when enthusiasm is at a frenzy.

By the time a growth stock forms its third base, investor enthusiasm has waned. Gains tend to be smaller, and the chance of a failed breakout increase. Many growth-stock runs die after the fourth base. Few stocks can sustain a move above such late-stage bases.

Counting Bases In Growth Stocks

Here’s the first rule of counting bases: Stocks must climb at least 20% from the previous buy point before they can be considered to be in the next stage of base formation. So, if a stock climbs only 10% or 15% from a first-stage base, the next base hasn’t graduated to second-stage status. Indeed, a stock can form multiple bases that are all second-stage, for instance.

Only when there’s a clear separation between bases — i.e., gains greater than 20% — should the base count move up.

To accurately gauge base stages, first make sure you know how to identify the principal patterns, such as the flat base, cup with handle and double bottom.

With new issues, it’s easier to count bases because the stock is just getting started. But stocks don’t just keep adding base stages indefinitely. After a long while, base counts reset. Most often, that happens when a decline is so big, the stock undercuts its prior base. An unusually long consolidation — about a year — also resets the base count.

IBD MarketSmith offers an add-on that identifies most bases and their stage number. Weekly charts are best for counting bases.

Growth Stock’s 2020-21 Advance

CrowdStrike (CRWD) was a huge winner in the bull market that followed the Covid-19 outbreak. The first base formed during the market dive and rebound in February-April 2020 (1).

The stock nearly doubled from that base to the next pattern, a double bottom in July-August 2020 (2). That second-stage base resulted in a 30% gain to the next base, a six-week cup in October and November (3). The count was now at a third-stage.

Backed by superior profit gains, the cybersecurity leader surged 63% to the next base, an 18-week pattern (4). This was a fourth-stage base and gains from it were expectedly smaller. CrowdStrike based one more time in September and October (5), then the stock rolled over.

It collapsed nearly 50% from the last buy point.

This article was originally published Feb. 25, 2023, and has been updated.

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