Investor's Corner: Major Corrections Reset Stocks' Base Counts, Allow For Fresh

Before a tsunami, the ocean often recedes.

The shoreline retreats into the ocean exposing areas not commonly seen. Shortly after comes the huge wave.

Tidewater (NYSE: - ) shares during the first week of October 2006 showed Wall Street's version of a tsunami -- the stock reset its base count.

But unlike the damaging effects of a tsunami, a base-count reset is a good omen for stocks.

When a stock's correction plunges below the lowest price in its previous base, its base count starts back from one.

It is as though the previous run-ups did not happen. In such a big decline, investors get shaken out, wiping the slate clean for a new wave of buyers to emerge.

When the market turns weak, it is a good time to be on the lookout for stocks sinking under their prior bases.

Taking time to spot those now could pay off later. With the market's shore receding into the sea, big things could be on the immediate horizon.

Tidewater broke out of a base in April 2006 (point 1) and made limited progress until it peaked at 62.88 (point 2).

Tidewater's shoreline, so to speak, receded. The provider of services to offshore drilling operations had set up and broken out of other bases stretching in 2004 and 2005.

The stock fell 36% until it bottomed in October (point 3). The correction clearly undercut the prior base (point 4).

Tidewater formed a 10-week cup-shaped base from September through early November (point 5).

It cleared that pattern and soon slipped into a new correction. This became a base-on-base pattern (point 6), and also a first-stage base by virtue of the count reset.

Shares rose 45% from a 55.10 buy point 15 a July 23 peak (point 7).

Besides deep corrections, stocks also reset their base counts when a bear market occurs.