When looking for stocks to buy, first learn to spot certain patterns in a stock’s chart. IBD identifies these as the proper bases, which give the stock a clear price at which to buy shares.
The flat base is one of eight reliable patterns IBD has identified for growth stocks.
Flat bases are unique in that the stock moves sideways for weeks. A flat base will often form after a flask successfully breaks from a cup or other type of base. From there, the stock will then come to a standstill for a period of time, and this price action forms the flat base.
Breakout Stocks: Recognizing a Flat Base?
Often the stock moves sideways because of a weak or sideways market. When the general market finally starts to rise, the stock will move higher out of the flat area.
Despite its mundane appearance, the flat base actually reflects hidden strength. Instead of bending lower, as a stock would when molding a cup without a handle or cup with a handle, the price remains stable. This action tells you that there is a lot of bullish pressure on the stock to move higher.
Main features of the flat base
These are the main features of the flat base:
First, a flat foundation must be built for at least five weeks. From there, it can extend much longer, as long as the stock maintains a horizontal pattern.
Second, flat bases tend to be narrower than other bases in terms of the percentage drop from high to low in the stock. The drop usually ranges from 10% to 15%. If you find a stock that has fallen more than 15%, it would probably qualify as a handle cup or some other type of base.
Finally, investors should wait to buy the stock until it rises 10 cents above the highest price in the flat base. Once the stock has risen more than 5% above the buy point, don’t chase it. Otherwise, you’re more likely to get caught up in a normal pullback.
Nvidia’s Flat Base
Nvidia (NVDA) formed a flat foundation that began building in August 2016, according to the MarketSmith chart analysis tool. MarketSmith’s pattern recognition helps investors identify these basic bullish patterns.
Nvidia’s flat base was completed with a breakout in September 2016 and lasted a total of five weeks. The high of the base, 63.50 plus 10 cents, gave a true buy point of 63.60. On the week of September 23, 2016, Nvidia stock broke above the buy point in heavy volume. In any breakout, look for volume that is at least 40% above the stock’s average sales.
Note that Nvidia stocks just got off a huge price run after breaking out of a cup-with-handle base. The earlier breakout happened in March 2016. Nvidia rose more than 75% of that handle cup and stayed above the 50-day line the entire time, a bullish sign. The stock then continued to form the flat base.
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