A flat base is one of the more common base patterns in a bull market and is one of the easiest to identify using daily and weekly charts at IBD MarketSurge.
The base starts, like all bases, with a pullback. But the depth of a flat base does not exceed 15%. When that little dip follows a rally showing the stock is in a clear uptrend, it can actually be very calm and constructive action before the next move up.
The easiest way to spot a flat base is when a stock pauses after a nice uptrend. The stock does not make very big moves and shows rangebound action on both its daily and weekly charts. A flat base can be formed in as little as five weeks but can be much longer.
The tighter the trading in the flat base, the better. It's preferable to erratic, "wide and loose" price swings that can make the pattern flawed. Sideways action after a prior uptrend can often lead to strong gains after a breakout, especially if the stock clears its buy point in higher volume. Sometimes, a three-weeks-tight pattern can extend to form a flat base.
How To Find The Correct Buy Point
The buy point is the highest price in the base. It is usual to find that price at the left side of the base just as the stock started to pull back. However, if the stock went through some volatility while building the flat base, the buy point may be in the middle or even right side of the base.
A quick check will tell you if the key moving averages are also rising as the stock carves a flat base. That would be a confirmation of the stock's underlying strength.
An early-stage flat base is an added advantage that can increase the chances of a sustained breakout. Early-stage bases are preferable to later-stage ones because later-stage bases form after a stock has made a big run already.
Apple broke out during the week of Aug. 2, 2019, from a cup-with-handle base that had a buy point of 215.31 (1). But the stock fell hard the next week to mark the start a flat base. Apple quickly rallied back above its 10-week line and broke out during the week of Sept. 13, clearing a buy point of 221.37 (2). Early gains faded on the breakout week, but after a two-week pullback, Apple cleared an alternate entry during the week of Oct. 4 (Point 3). It was also an early-stage breakout led to a 48% gain as Apple stock hit a new high of 327.85 on Jan. 29, 2020 (4).
Please follow VRamakrishnan on X/Twitter for more news on the stock market today.
