Though perhaps the least exciting pattern in terms of taxonomy, a flat base pattern can return profits as well as any other base structure.
A flat base is a shallow formation. From its peak, the stock will not fall more than 15%. If the depth exceeds 15%, you may have another type of pattern, such as a cup with handle, cup-without-handle base, or what MarketSurge pattern recognition will simply identify as a consolidation.
The sideways, rangebound action of a flat base may appear dull at first glance but can be a sign of continuing institutional demand.
Identifying The Flat Base
A flat base commonly occurs after a stock has already advanced 20% or more from a previous base. As the stock digests gains and investors begin to take profits, institutional investors are there to purchase it. Big money — such as mutual funds, pension funds, or hedge funds — are slowly accumulating shares. That keeps the stock from falling too much.
For at least five weeks, this process creates a relatively tight area of both support and resistance.
Institutional investors want to avoid paying above a certain price and will wait for the price to drift back down. In doing so, investors get shaken out because they lose patience rather than because of a sharp drop in price.
Without a rapid increase in price, they pull out and search for other growth stocks in which to put their money.
Though most commonly found as a second- or third-stage base, a flat base is no slouch when it comes to first-stage bases.
The buy point is the highest price at the start of the pattern. Look for volume to jump at least 40% when the stock crosses above that level.
Meta Stock Flattened Out Before Running Up
Facebook parent Meta Platforms fell 73% during the 2022 bear market. Its rebound was well underway by the start of 2023, but Meta had yet to present a clear-cut entry.
Following February's earnings report, Meta stock shot up nearly 23% (1). Between the announcement of a new division focused on AI incorporation and deeming 2023 the "Year of Efficiency," CEO Mark Zuckerberg managed to quell investor's fears. The stock needed to cool off after such a big rally. But Meta corrected only 15% (2) in the five weeks that followed.
In the week ended March 17, Meta stock cleared the 197.16 buy point with support at the 10-week moving average in volume 51% above average (3). This run would last four months until the stock topped out in late July for a 65% gain.
