By Simon Constable 

When investors first read or hear the term "Brobdingnagian base" they might be taken aback. Not only is "Brobdingnagian" a mouthful to pronounce, it is a literary reference that at first glance might seem unrelated to finance.

But understanding what the phrase means could be beneficial because some analysts use it to describe potentially large profit-making opportunities in markets.

Coined in the early 2000s by John Roque, now a technical analyst at Wolfe Research in New York, the term combines two words: one from the world of letters (Brobdingnagian) and the other from the realm of finance (base).

In Jonathan Swift's classic novel "Gulliver's Travels," Brobdingnagian describes the people who live in the fictional country of Brobdingnag, a land inhabited by giants. Base, meanwhile, refers to a bullish chart pattern where the price of a security or other asset has moved sideways within a defined price range for a period.

The longer the sideways price action has gone on, the bigger a subsequent rally is expected to be, according to technical analysts, also known as chartists, who analyze stock-price patterns, among other things, to forecast where prices are headed. So-called Brobdingnagian bases are those that have lasted for many years and thus are pointing to the potential for a gigantic rally.

This kind of price pattern can arise in two ways, says Jonathan Krinsky, chief market technician at New York-based broker-dealer Bay Crest Partners. It can be a sideways consolidation of an asset price in a rising trend, or it can be due to the reversal of a bear-market trend. Investors tend to be wary of assets that have failed to perform for a long period, Mr. Krinsky says, and that caution is seen as a bullish signal, or sign that the asset price will rally.

One historical example of a Brobdingnagian base involves the stock of Microsoft Corp., which moved sideways from 1999 to 2016. In 2016, the price finally broke through the previous all-time high of around $60 reached in 1999. "At that point, people thought of it as a stodgy old tech stock," Mr. Krinsky says.

After the $60 price was breached, the stock continued to rally to more than $220 recently. Simply put, the 17-year-long Brobdingnagian base was a precursor to an almost fourfold jump in the price of the stock.

Another example of an even more impressive Brobdingnagian base is the Nikkei Stock Average, which tracks the Japanese stock market. That base started three decades ago in 1991 and broke out of the sideways trade about two months ago, on Nov. 5, according to a recent research report by Mr. Roque.

If history is any indication, the upward move in the Nikkei may be just the beginning. From January 1920 to January 1948, the Nikkei formed a base that lasted 28 years, according to Mr. Roque's report. Following that base, the index rallied 2,200% over the next 14 years, including two bear-market interruptions when it temporarily lost 45% and 26%, respectively.

Or as Mr. Roque titled the chart in the report: "The Land Most Investors Forgot Being Remembered."

Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.

 

(END) Dow Jones Newswires

January 10, 2021 09:14 ET (14:14 GMT)

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