When a stock shows low volatility over a period of time, it may have formed a flat base, one of the most important chart patterns for growth stocks.
Bases differ in shape, duration and depth. Deeper bases can result in a cup-without-handle or cup-with-handle base. But the flat base is shallow and fairly simple to identify.
From a peak, the stock does not fall more than 15% from its high to low over a period of several weeks. The sideways movement may appear to be without direction. It may also appear that the stock is not really acting like a growth stock while it's rangebound.
However, the flat base can be a bullish formation. Because the depth is shallow, it is a sign that there's still institutional demand for the stock.
Key Features Of A Flat Base; Growth Stock Example
Flat bases should last at least five weeks and may form over a few months.
The buy point is 10 cents above the highest price within the base. The highest price is most often at the start of the base, but in rare cases can be in the right side or even the middle of the base. The buy zone is from the buy point to 5% above it, as it is with any other type of base.
An exceptional example was Google parent Alphabet and its performance from December 2020 to June 2021. The stock built three flat bases in that time as the stock gained 37%. In comparison, the Nasdaq gained 10% in the same time period.
The first flat base formed from December 2020 to January 2021 (1) with a buy point of 92.19. The stock broke out of the six-week base on Jan. 20 and surged 16% before building the next flat base, in February and March of 2021 (2) with a 107.26 entry.
Shares gained 13% from the buy point. Then, Alphabet started yet another flat base, in May and June 2021 (3). The stock broke out at a 121.57 entry and climbed as much as 24% to a peak in November 2021.
It is also worthwhile to consider the market conditions while a stock builds it base. Usually when the market is struggling, growth stocks tend to reflect that lackluster movement, which results in a base.
However, this may sometimes not lead to growth. In September 2021, GOOGL built a third-stage flat base for eight weeks with a 146.25 entry. The Nasdaq declined 2% in the same time frame. Though shares broke out, the growth stock quickly lost the 50-day moving average and went on into more sideways action before declining in 2022.
This can be seen on IBD MarketSmith.
This article was originally published March 17, 2023, and has been updated. Follow VRamakrishnan on Twitter for more news on stocks, chart patterns and analysis.
