As the downtrend continues lower through the Cycle Of Price Action, it will drop below support and consolidate briefly before finding persistent resistance at the declining moving averages.

The Downside Base n’ Break, occurs when the moving averages continue to resist the price while they guide the stock lower.

When weakness has been confirmed, and sellers continue to distribute the stock, you will see the price decrease to new lows, followed by a brief pause before continuing its downtrend. Like the Base n’ Break during the uptrend, this pattern will help recognize how the Cycle Of Price Action progresses over time.

Understanding where you are within the cycle will help you stay on the right side of the trend. During a confirmed downtrend, Oliver Kell stays short, mainly in cash, screens for relative strength on individual stocks, and waits for the index to reverse.

The Downtrend Continues

Just like the Downside EMA Crossback, the Downside Base n’ Break is a mechanism used to measure the trend between the Wedge Drop and the Reversal Extension. When the index is below the declining moving averages, Oliver Kell patiently waits while screening for stocks showing relative strength.

Like every step in the Cycle Of Price Action, each individual stock and market cycle will have its own unique Downside Base n’ Break formations. Understanding the character of the stock, or the strength of the index, will help when analyzing the price action.

In weak bearish trends, there may be multiple Downside Base n’ Breaks as the stock continues to get sold. In stronger bullish trends, the index may reverse quickly after support is found.

As the Downside Base n’ Break is forming in a downtrend, the best thing to do is wait.

Wait For Volatility Contraction

The general market environment will dictate how quickly a stock will consolidate its recent trend. Downtrends experience sharper selloffs due to fear, leading to higher volatility compared to uptrends where investor confidence gradually builds.

In weak market conditions, you may think the market is forming a Reversal Extension only to see the price find resistance at the moving averages, roll over and form another Downside Base n’ Break, and then make a new low. Expect heightened volatility in stocks trending below the declining moving averages.

Waiting for a contraction in volatility will present an optimal trading environment. The most profitable trades occur after a stock consolidates tightly, establishes a clear pivot point, and the overall market trend supports the direction of the trade.

The trend will still be lower until a Wedge Pop confirms the Reversal Extension. Stay patient when watching the index while screening for the strongest stocks.

Indices And Stocks

The leading stocks will guide the market. Just like they make new highs before the market, the leaders will also be the first to begin showing signs of weakness.

The general market then dictates how aggressive or defensive traders should be. When weakness continues after the price is below the moving averages there will not be many stocks setting up or breaking out to new highs.

If there are no stocks set up when the index is in a downtrend, continue to be patient and wait for a proper setup.

When the index is below the moving averages and breaking through a Downside Base n’ Break, look for any stocks that have already reversed and begin to find support or are making a higher low. The leading stocks could potentially be forming an EMA Crossback, to the upside, while the index breaks down and forms a Reversal Extension.

Screen For Stocks Showing Relative Strength

Relative Strength (RS) measures a stock’s performance compared to the overall market. If an individual stock is performing better than the index it is showing RS.

Look for stocks that are further along in The Cycle Of Price Action compared to the broader market. Stocks that are breaking above the moving averages when the index is below the moving averages are showing RS and should be monitored closely.

Use the Downside Base n’ Break to the downside to monitor the cycle on the index while screening for individual stocks. The strongest stocks will hold support or make a new high when the index breaks and makes a new low.

Examples

A gap down from highs, followed by a Wedge Drop marked the 2021 top for DECK. After a retest and failure at previous highs, the downtrend continued with multiple Downside Base n’ Breaks to the downside. March saw a possible Reversal Extension but ultimately failed with another Downside Base n’ Break. The true reversal is never known until after the fact when a Wedge Pop confirms a new uptrend.

TMDX chopped around near highs through most of 2023 until a gap down Wedge Drop confirmed a downtrend. When a stock is below the declining moving averages it is best avoided as finding the bottom can be very costly. TMDX dropped more than 60% off its highs before a monster gap up started one of the strongest moves in 2024

At the end of 2021, many technology stocks peaked when they couldn’t find traction into new highs. MSFT price action became extremely volatile as it whipsawed up and down. A Wedge Drop confirmed the downtrend and did not see follow-through volume on any rallies throughout 2022.

Putting It Together

The Downside Base n’ Break to the downside serves as another checkpoint within the Cycle Of Price Action during a downtrend.

A Downside Base n’ Break signifies a stock’s breakdown through a brief consolidation below the declining moving averages but more importantly, provides insight into where we are in the trend.

Remember, patience is key. Oliver Kell emphasizes waiting for a contraction in volatility before entering trades.

Use the time out of the market to screen for stocks exhibiting relative strength while the broader market looks to find support.