When a stock shows low volatility over a period of time, it may have formed a flat base, one of the most important chart patterns for growth stocks.
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Bases differ in shape, duration and depth. Deeper bases can cause a cup-without-handle Or cup base with handle. But the flat base is shallow and quite easy to identify.
From a peak, the stock does not fall more than 15% from its high to its low over a period of several weeks. Lateral movement may seem directionless. It may also appear that the stock is not really acting as a growth stock while it is constrained.
However, the flat base may be a bullish formation. Because the depth is shallow, it is a sign that there is still institutional demand for the stock.
Main characteristics of a flat base; Example of growth stocks
The flat bases should last at least five weeks and can form in a few months.
THE point of purchase is 10 cents above the highest base price. The highest price is most often at the beginning of the base, but in rare cases it can be on the right side or even in the middle of the base. THE shopping area is from the buy point to 5% above, as is the case with any other base type.
An outstanding example was Google parent Alphabet (GOOGL) and its performance from December 2020 to June 2021. The stock has built three flat bases during this period, with the stock gaining 37%. By comparison, the Nasdaq gained 10% over the same period.
The first flat base formed from December 2020 to January 2021 (1) with a buy point of 92.29. The stock broke out of the six-week base on January 20 and jumped 16% before building the next flat base, in February and March 2021 (2) with a 107.36 entry.
The shares have gained 13% since the point of purchase. Then, Alphabet launched yet another flat base, in May and June 2021 (3). The stock broke at an entry of 121.67 and climbed as high as 24% to hit a high in November 2021.
It’s also worth considering market conditions as a stock builds its foundation. Usually, when the market is struggling, growth stocks tend to reflect that lackluster movement, resulting in a bottom.
However, sometimes this may not lead to growth. In September 2021, GOOGL built a third tier flat base for eight weeks with an entry of 146.35. The Nasdaq fell 2% in the same time frame. Although stocks broke out, growth stock quickly lost the 50-day moving average and continued more sideways action before declining in 2022.
It is seen on IBD MarketSmith.
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