IPO Bases – A Comprehensive Study

In recent years, IPO bases emerged as a key trading strategy in the Indian fintwit community, mainly due to their easy setup assessment and the explosive moves they generate. As a result, the setup has evolved significantly beyond traditional IPO base formations, including the trade management rules applied to them.

I conducted a deep dive into IPO bases in 2021, primarily based on the rules of Mike Webster & the legendary late William J. O’Neil. In this article, I will attempt to share my learnings and experience over the past four years to help those looking to integrate this setup into their trading arsenal or deepen their understanding of its formation.

Why IPO Base Work?

Every year, several companies list their stocks in the secondary market. Some are fundamentally strong and debut at reasonable valuations, while others list at excessive valuations, offering little incentive for strong hands to buy or hold. So, what makes IPO bases among the most lucrative opportunities in the market?

IPO Bases leverage the explosive combination of value-price gaps, limited institutional ownership, and low float:

This combination makes IPO bases one of the most explosive setups for both short-term and long-term trading strategies. While the value-price gap serves as the primary driving force behind the trend, a low float with limited institutional ownership fuels the explosive advance.

Situational Awareness For An IPO Base Formation

IPO bases tend to behave like high-growth stocks. While they can withstand most weak market conditions during a bull run, they also experience some of the most spectacular crashes when market sentiment turns extremely bearish. However, they can survive even during choppy phases, driven by the intrinsic value they offer.

• #HARIOMPIPE delivered a remarkable 200% gain from August 2022 to July 2023, despite a bearish market environment. The stock endured strong shakeouts and corrections in December 2022, as well as in January and March 2023.

• #AWL delivered an impressive 150% return in a short span from March 2022 to May 2022, despite extremely weak market conditions.

Key Elements Of An IPO Base Formation

Every trading setup we follow is based on three key elements:

• Context: The primary driving force in the stock.
• Setup: The consolidation phase that absorbs the built-up supply from the context and facilitates the next leg of advance.
• Entry: The signal that the setup has matured, indicating that supply is exhausted and the stock is ready for the next leg of advance.

Context In An IPO Base Formation

The most crucial factor in assessing the context of an IPO base is evaluating the value-price gap. This gap, which can be either positive or negative, is the driving force behind the post-listing uptrend or downtrend. It is measured through Demand Assessment, which is based on three factors:

The first indication of value in an IPO comes from subscription data, revealing whether the public and institutions are willing to subscribe at the issue price. Strong demand, especially oversubscription on the first day, signals high interest among market participants, often leading to a premium listing and post-listing gains.

However, subscription demand is often influenced by prevailing IPO market sentiment. During euphoric phases, even weak IPOs attract excessive demand, while in bearish conditions, investors hesitate to subscribe to strong IPOs, leading to mispricing. In the retail segment, IPOs are often seen as lottery tickets—if allotted, one can make easy money with minimal effort. As a result, fear sets in when the odds of listing gains appear low.

The internet bubble in the late 90s is a prime example of how investor sentiment influences subscription. During this period, many stocks with a “.com” in their name often listed even at a 10x premium over their issue price.

A listing at a premium, followed by continued buying in the initial days from the open market, signals robust demand for the stock, indicating the presence of a value-price gap:

While a few days of gains before the formation of the base are preferred and enhance the setup, it isn’t always critical for stocks that list at a decent premium over their offer price:

• #EXICOM was listed at an 87% premium over its issue price; however, the stock declined post-listing, leading to the formation of an immediate base.

Setup For The IPO Base

From my experience with IPO bases over the past few years, I’ve found that the most crucial aspect of an IPO base is the base formation itself, as it help assess the supply present in the stock.

Conventional Rules For An IPO Base Formation:

• Timing: Any consolidation forming within the first five weeks of listing qualifies as an IPO base. A stock can form multiple IPO bases, collectively considered part of the IPO base family.
• Depth: The base depth generally ranges from 20% to 30%, but in extreme cases, it can reach up to 50%.
• Duration: IPO bases typically last up to five weeks (though, in my experience, they can extend to six to nine months as well).

#SHANKARA qualifies as a textbook IPO base, forming within the first five weeks of listing. The base was 16% deep and lasted eight weeks, exhibiting systematic volatility contraction before an explosive breakout. The stock surged 225% over the next six months.

My Personal Observations On IPO Base Formation

Based on their distinct characteristics, depth, and duration, IPO bases can be categorized into five types:

• The J-Curve Formation
• IPO Flags
• IPO Shallow Bases (Flat Base)
• IPO Deep Bases (CNH)
• IPO Bottom Carving

The J-Curve formation and IPO Flags share similar characteristics and are capable of producing similar outcomes. On the other hand, Shallow Bases, Deep Bases, and Bottom Carving differ in terms of depth, duration, and the outcomes they generate, depending on the overhead supply they encounter.

The J-Curve Formation And The IPO Flags

The J-Curve Formation: The J-Curve formation is a rare and unique formation that occurs within 3-to-7 days of the stock’s listing. This formation is identified by a bar-by-bar assessment of urgency and supply absorption immediately after the stock’s listing.

• #BIKAJI formed a J-Curve Formation within the first five days of listing, marked by immediate supply absorption. This is observed through a bar-by-bar range contraction, tightening to its maximum before the breakout. Inside bars established the pivot, indicating that the setup is ready for a breakout.

This formation produces an immediate and explosive breakout leading to a 20%-to-50% gain within a short duration of 5-to-7 days.

• #BIKAJI delivered an explosive move post breakout, gaining 40% in just five days.

• #WAAREEENER formed a J-Curve formation within just three days of listing, resulting in a 50% gain over the next five days post-breakout.

IPO Flags: The IPO Flags closely resemble the J-Curve formation, developing within the first 5 to 7 days of listing, followed by a flag formation lasting another 5 to 7 days. Like the J-Curve, they lead to an explosive breakout, often resulting in gains of 50% or more within a short period:

• #IREDA formed a short flag over five days after two days of gains post-listing. The stock surged 88% within five days after the breakout.

Both the J-Curve and IPO Flags require either selling into strength or tight trailing to secure gains, as they can lead to prolonged bases once the move exhausts or even round trips, erasing all unrealized profits.

IPO Shallow Bases, Deep Bases And The Bottom Carving Formation

Based on depth, IPO bases are categorized into three types:

• Shallow Bases (15%-20% deep): Resembling a flat base, these formations indicate minimal supply in the IPO base formation.
• Deep Bases (30%-35% deep): Similar to a Cup and Handle formation, these bases suggest a more extended consolidation phase before a breakout, leading to proper supply absorption.
• Bottom Carving Formations (deeper than 35%): Reflecting characteristics of Stage 4 and Stage 1 formations, these bases indicate a prolonged correction and accumulation phase before potential recovery.

Apart from depth, the duration of a base also plays a crucial role in the outcome of an IPO base formation. However, duration should always be evaluated in proportion to depth.

We categorize IPO bases into four distinct types based on their depth and duration, each leading to unique behaviors and outcomes:

Shallow and Narrow Bases

Shallow, narrow bases indicate a lack of strong supply in the IPO and often lead to some of the most explosive moves in the market. These bases typically last up to three weeks with a depth of 10-20% and can sometimes form in as little as 7-8 days.

• #JYOTICNC formed a shallow, narrow base with a 15% depth over just 8 days, leading to a spectacular 200% advance from the IPO breakout area.

• #GALAPREC formed a shallow, narrow base with a 12% depth over just 11 trading days, resulting in a 73% advance from the IPO base breakout level.

Shallow and Wide Bases

Shallow and Wide bases are the most ideal form of an IPO base formation, suggesting lack of supply along with a systematic volatility contraction. While the depth is usually under 20%, it can be 3-to-6 months long:

• #SHANKARA formed a model shallow and wide base with a 16% depth over eight weeks, leading to a clean 225% advance over the next six months from the base breakout area.

Deep and Narrow Base

Deep and narrow bases typically last 2 to 5 weeks and can be up to 35% deep. Their depth indicates the presence of supply, requiring proper absorption through systematic volatility contraction. These bases can yield successful breakouts when demand is exceptionally strong.

• #EXICOM formed a 37% deep base over five weeks (due to high market volatility) and produced a breakout. However, the stock required an additional basing phase post breakout before delivering a strong move. Also notice how it formed a tight area during the recovery before attempting the breakout.

• #QUADFUTURE formed a 29% deep base over 12 days (influenced by market volatility). After establishing a small volatility contraction area, indicating supply absorption, the stock produced a spectacular breakout. The trade remains ongoing.

However, when a base is significantly deep and approaches its left-side high with time compression, it tends to have a very high failure rate.

• #BLSE had a 30% deep base and approached its breakout directly from the bottom in just three bars, leading to a failure.

• #UNIECOM formed a 27% deep base and attempted a breakout directly from the bottom within just five days of consolidation, leading to a failure.

• #TRACXN formed a 35% deep base over seven weeks but attempted a breakout directly from the bottom with time compression, leading to a failure.

Deep and Wide Bases

Deep and wide bases absorb supply through systematic volatility contraction, resulting in powerful moves post-breakout. These formations indicate informed buying and often lead to exceptional advances. They can be up to 35% deep and even form a six to nine months of consolidation before breaking out.

• #EASEMYTRIP formed a 31% deep base over eight weeks, leading to a powerful 250% advance from the breakout area.

• #ORIENTTECH formed a 29% deep base over nine weeks, leading to a strong 120% advance post-breakout.

Bases that are too deep, usually greater than 40%, often encounter strong supply resistance and need a well-formed bottom structure to achieve a successful breakout.

• #AWHCL formed a 52% deep bottom-carving pattern over two years before achieving a successful breakout, no longer qualifying as an IPO base.

However, these often provide a fertile ground for #EpisodicPivot formations, which can lead to some of the most spectacular moves in the market.

Entry Techniques For The IPO Base Setup

In conventional IPO base studies, entry is typically taken upon the breach of the left-side high of the setup. However, in my observation, all tight areas at the bottom and right side of the base also qualify as equally successful entry points. They provide better pivots and a well-defined stop-loss zone, enhancing trade profitability.

• #SHANKARA formed a clean low cheat area near the bottom of its base, offering an excellent entry point with a reasonable 4.5% deep stop-loss before breaking out. In such cases, when the broader context is supportive, waiting for a breach of the left-side high of the base is unnecessary. However, these can be useful for scaling up the position.

• #KRN formed a well-structured mid-cheat with proper volatility contraction well before the standard base breakout, leading to a spectacular advance post-breakout.

Entries can be further refined using the PDH and ORB entry techniques when proper tight areas form, allowing for a significantly reduced stop-loss and maximized profitability.

Further Notes About The IPO Base Formation

Demerged Entities and IPO Base Formations

Demerged entities often behave similarly to new IPO stocks when forming an IPO Base:

• #JUBLINGREA was listed on the exchange in April 2021 after demerging from a listed entity, Jubilant Lifescience. It produced a spectacular 140% advance in six months after forming a shallow and narrow IPO base.

Thematic Stocks and IPO Bases

Pay special attention to newly listed stocks in trending or futuristic themes, as they often produce mesmerizing moves from IPO bases:

• #IREDA was listed in November 2023 when the Renewable Energy and PSU themes were in the spotlight in the Indian stock markets. The stock formed an IPO Flag setup and delivered a massive 230% gain in just eight weeks post­ breakout, resulting in a total 340% advance within 9 weeks of its listing.

• #SONACOMS made a 100% advance post-IPO base breakout. As a leading company in the EV sector with a growing market share, it got listed when the EV theme was in the spotlight in the market.

Episodic Pivots in Newly IPO Stocks

Episodic Pivots in newly IPO stocks often lead to some of the most remarkable advances in the market:

• #HAPPSTMNDS produced an Episodic Pivot formation within a deep, wide IPO base, resulting in a massive 340% advance over a 5-month period.

• #AZAD received a massive order from Rolls Royce on 29th Jan 2024, triggering a huge 200% surge over 5 months from a shallow, narrow IPO base formation.

Episodic Pivot formations, even in struggling IPO stocks, can lead to explosive advances by triggering value unlocking. This, combined with limited ownership and a low float, often results in significant moves.

• #ANGELONE made an explosive 450% advance in six months following an episodic pivot formation, despite struggling after its listing.

• #NETWEB produced a massive 250% advance over one year, driven by its collaboration with NVIDIA.

Excessive Demand Before Listing Often Leads to Failures

Contrary to conventional wisdom, excessive demand before listing – such as oversubscription, listing at a premium, and immediate advances often results in significant failures:

• #LATENTVIEW experienced massive demand, with a 326x oversubscription and a 160% premium at listing, followed by a 47% immediate gain. However, the stock quickly lost 60% of its value post-listing.

• #APOLLO also saw huge demand before listing, with a 248x oversubscription and a 74% premium over its issue price. However, the stock experienced a negative listing and lost 90% of its value immediately after listing.

Stocks with too large issue sizes or those that primarily consist of offer for sale (OFS) tend to face similar issues. It’s best to avoid these stocks for IPO base formations.

Mispriced Listings: A Unique Opportunity

Mispriced listings, where stocks either don’t see much demand or list negatively due to market conditions, offer an extremely unique opportunity to profit through IPO base formations:

• #AWL was listed 10% below the issue price due to the unfavorable market conditions in February 2022, when the Russia-Ukraine war began. The stock surged 286% post-listing within 11 weeks, including a 150% gain in just 6 weeks after the IPO base breakout.

Final Comments

While IPO bases offer a unique opportunity to profit in the stock markets, their true potential is realized when managed effectively. Poor trade management can lead to underperformance or failure. Therefore, effective trade management is just as crucial to profiting from IPO bases. This will vary significantly between different setups, such as J-Curve and Flags versus a Deep and Wide base or an IPO base breakout occurring with an Episodic Pivot formation.

Note: Some of the learnings and observations shared here may apply specifically to India and might not be directly applicable to other countries or may require modification when applied elsewhere. The author may also have positions in a few of the stocks mentioned above.