In the earlier weekly special articles, we have seen various types of chart patterns that can appear on data graphs. In this week we will focus on a particular chart pattern that is a simple consolidation to understand, yet has a hidden strength in it.
In a cup-with-handle or double bottom, the success of the breakout depends on the way a stock rises and falls within the base. A third pattern shows that a stock can choose to take neither path before its big move north. Rather than approaching an uptrend or downtrend, the stock moves sideways for weeks or months. This action is known as the flat base.
This pattern often forms after a stock breaks out of a cup or other base, gains ground for a few weeks, and then stalls. Why? The market might not be ready for a strong rally or is still weak. A flat base reflects unusual strength. Instead of bending lower, it keeps a steady price level. This particular action helps us to understand that the stock wants to run higher.
When the market finally begins to rally, the stock explodes out of its crouch position. A number of past huge winners began their price moves from a flat base.
Recalling its structure, a flat base must be at least five-weeks in length with a percentage decline of the stock’s high to low usually in the range of 10-15%.
The pivot point or ideal buy point is when the stock rises above the high in the flat base. Sometimes the price high is found on the left end of the base. In other cases, the high is in the middle of the base or on the right. Buy it as close as possible to that pivot point. Don’t chase it if it’s already more than 5% above the pivot.
When the stock drops within the base, institutional investors step in to shore up the stock. The stock doesn’t fall further as investors overall feel comfortable with the stock’s current price.