Investor's Corner: Lesser-Known Saucers Can Yield Gains

A Siberian Husky and an Alaskan Malamute can look similar, but they are different animals. That's the same for the cup-without-handle base and less-common saucer pattern.

A distinguishing feature of a saucer is the length of the base. They typically take longer to brew. Saucers can range from a few months to a year or more. But some can be as short as seven weeks.

Saucer bases usually correct 12% to 20% from peak to trough. But some can correct up to 30%. Compared to cup-type patterns, price action within saucers tend to be more spread out. This makes the pattern appear more shallow, like its namesake.

Stocks can either scare you out or wear you out. The longer a saucer takes to form and the more gradual its correction, the more likely it will tire out the weak holders.

This kind of action will give stocks in saucer bases lower IBD ratings, which may be passed up on if your stock screens are too strict.

For example, take the Relative Price Strength Rating. It is computed using a stock's 12-month price performance compare to all other stocks in the IBD database.

A stock that's consolidating in a saucer may have an RS Rating that's well below 85.

By the time it's finished the base, the RS Rating might be in the 50s or 60s. The mostly lateral movement will weigh on its price performance.

As with most chart patterns, the buy point in a saucer is 10 cents above the high of the pattern. But a handle can give the saucer a lower entry point. Just make sure there are at least five days in the handle.

After peaking in early August 2005 1, electric power producer Entergy (ETR) went on to form a near yearlong saucer base. The pattern corrected 16%.

The stock shaped an eight-day handle in late July, giving a 78.60 buy point 2. (Click here to see Entergy's handle on the daily chart.)

It cleared the handle in the week ended Aug. 11, 2006 3. It retreated to its 10-week moving average, but then resumed its uptrend. The stock gained 20% by December 4.

Another way to interpret Entergy's price action was this: The weeks from mid-August to late September formed a tight seven-week handle and a 79.80 buy point.