We usually see how the best stocks form cup-with-handle and double-bottom bases before they make big moves. However, stocks cannot make higher highs despite their superior fundamentals and growth stories. They’ll go up for a while, take a breather, pull back to form a new base, and then resume their climb – giving you multiple opportunities to make money. The flat bases are a classic example in this regard, which are typically formed after a stock has made a nice gain from a cup-with-handle or double-bottom breakout. That’s why they’re often considered “second-stage” bases.
Here are the key concepts to understand about flat bases:
Trading Sideways to “Digest” Earlier Gains: Stocks often break out of a cup-with-handle or double-bottom pattern to run up at least 20% before essentially trading sideways to form a flat base. It’s a mild decline compared with other patterns (no more than 15%). Usually, the price range remains fairly tight throughout a flat base. It may imply that institutional investors — who have to buy tens of thousands or more shares to establish a large position — are quietly buying within a certain price range. That’s how they increase their holdings without significantly driving up their average cost per share.
Support and Resistance: Again, the buy point is above the most recent area of resistance (the highest price point within the flat base). Until the stock breaks through that “ceiling” (preferably on above-average volume), it won’t be able to launch the next leg of its climb.
Shakeout: Like other patterns, flat bases also have a way of shedding weaker holders. Instead of a sharper sell-off like the handle in a cup-with-handle or the second-leg undercut in a double-bottom, the flat base shakeout is more of a slow grind. The weaker, less committed investors just get worn out by the indecisive, sideways action, and eventually, lose patience and sell.
What to Look For In a Flat Base:
- Prior uptrend: 20% or more
- Base depth: 15% or less
- Base length: At least 5 weeks.
- Ideal buy point: 0 to 5% above the most recent area of resistance (the highest price point within the flat base.)
- Volume on the day of a breakout: At least 40–50% above average
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