If you’re looking for stocks to buy, first learn to recognize certain patterns in a stock’s chart. IBD identifies these as 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 because the stock moves sideways for weeks. A flat base will often form after a stock successfully breaks out from a cup or other type of base. From there, the stock will then stall for a period of time, and this price action is what forms the flat base.
Breakout Stocks: How To Spot A Flat Base
Often the stock moves sideways due to a weak or sideways market. When the overall market finally begins to rally, the stock will move higher out of the flat area.
Despite the mundane look of it, the flat base actually reflects hidden strength. Instead of bending lower, like a stock would when forming a cup without a handle or cup with handle, the price holds steady. This action tells you there’s a lot of bullish pressure on the stock to run higher.
Key Traits Of The Flat Base
Here are the key characteristics of the flat base:
First, a flat base must build for at least five weeks. From there, it can extend for much longer, as long as the stock maintains a horizontal pattern.
Second, flat bases are typically more narrow than other bases in terms of the percentage decline from the stock’s high to low. The decline usually ranges from 10% to 15%. If you find a stock that’s declined more than 15%, it would likely qualify as a cup with handle or other type of base.
Finally, investors must wait to buy the stock until it rises 10 cents above the highest price in the flat base. Once the stock has moved more than 5% above the buy point, don’t chase it. Otherwise, you’re more likely to get caught in a normal pullback.
Nvidia’s Flat Base
Nvidia (NVDA) formed a flat base that began building back in August of 2016, according to the MarketSmith chart analysis tool. MarketSmith’s pattern recognition helps investors identify these bullish base patterns.
Nvidia’s flat base completed with a breakout in September of 2016 and was a total of five weeks long. The highest point of the base, 63.50, plus 10 cents gave a proper buy point of 63.60. During the week of Sept. 23, 2016, Nvidia stock broke out above the buy point in heavy volume. With any breakout, look for volume at least 40% above the stock’s average turnover.
Note that Nvidia stock had just come off a tremendous price run after breaking out from a cup-with-handle base. The prior breakout occurred in March of 2016. Nvidia ran up more than 75% from that cup with handle and remained above the 50-day line the entire time, a bullish sign. The stock then proceeded to form the flat base.
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