When a stock shows low volatility over a period of time, it can form a flat base, one of the most important chart patterns for growth stocks.
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Bases differ in size, span and depth. The deeper base may result in a cup-without-handle or a cup-with-handle base. But the flat base is shallow and fairly easy to identify.
From the peak, the stock declined no more than 15% from its high to low over a period of several weeks. Sideways movement may appear without direction. It may also appear that the stock is not really acting like a growth stock while it is rangebound.
However, a flat base could be a bullish formation. Because the depth is shallow, it is a sign that there is still institutional demand for the stock.
Main features of a flat base; growth stock example
Flat bases should last at least five weeks and can be built up over a few months.
The buy point is 10 cents above the highest price within the base. The highest value is often at the beginning of the base, but in rare cases may be on the right or in the middle of the base. The buy zone is up to 5% above it from the buy point, just as it is with any other type of base.
An exceptional example was Google Guardian. Alphabet ,Google) and its performance from December 2020 to June 2021. The stock made three flat bases in that time as the stock gained 37%. In comparison, the Nasdaq rose 10% over the same time period.
First flat base made from Dec 2020 to Jan 2021 (1) With a buy point of 92.29. The stock broke off a six-week base on January 20 and gained 16% before building on the next flat base in February and March of 2021. (2) With 107.36 entering.
Shares gained 13% from the buy point. Then, Alphabet projects another flat base in May and June 2021 (3), The stock broke at 121.67 on entry and climbed up to 24% in November 2021.
It is also useful to consider market conditions while a stock underlies it. Usually when the market is struggling, growth stocks tend to reflect that shortfall, resulting in a base.
However, sometimes this may not lead to growth. In September 2021, GOOGL made the third phase flat base for eight weeks with 146.35 entry. The Nasdaq fell 2% in the same time frame. Although shares rallied, the growth stock quickly lost the 50-day moving average and moved into more sideways action before 2022 declines.
It can be viewed on IBD MarketSmith.
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