The flat base pattern is a bullish continuation pattern that can be used to identify buying opportunities for stocks.
What is The Flat Base Pattern?
After a stock has experienced a successful break out from a cup-with-handle or double bottom, it will often go on to form a flat base pattern. This classic pattern is considered by many traders as a second-stage base and one that provides multiple opportunities for profits. After a stock advances a significant amount it needs to digest its recent move and forming a flat base pattern is a common way for the stock to do that.
A flat base can be identified on a chart by looking for two things. A prior uptrend of 30% or more, and a consolidation period where the stock’s price moves sideways within a narrow trading range of around 15% between the highest price point and the lowest price point. After the flat base is established, traders will watch for a break out of the flat base consolidation range and a continuation of the prior uptrend.
Basing refers to a stock consolidating in-between price moves. The process of basing occurs when a stock that has advanced significantly needs to digest the increase in price. This digestion period is often characterized by flat trading between overhead resistance and support of the flat base pattern. During this period of “flat” trading, the stock is building up internal strength. The key is to watch for signs of accumulation or distribution within the base. If the stock is being accumulated, it may break out of the flat base pattern with volume and begin a new uptrend.
Flat Base Pattern Rules
- Prior uptrend of 30% or more
- Base depth of 15% or less
- Base length at least 5 weeks.
- Volume on the day of the breakout should be at least 1.4x relative volume.
Flat Base Pattern Trading Mistakes
The flat base pattern can be a great way to identify potential long trades, but there are some common mistakes that traders make. One of the most common is entering too early and not waiting for the breakout of the flat base. Another mistake is not paying close attention to volume when trading flat bases. It’s important to look for significant volume on the breakout day, as this usually indicates that institutional traders are entering the stock.
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Is The Flat Base A Bullish Pattern?
The flat base pattern is considered a bullish setup and can be used by traders to identify stocks with potential upside. This pattern often signals that a stock is digesting its recent gains and almost ready to continue its prior uptrend. It's a concept that aligns well with strategies like the CANSLIM Investing Methodology. Flat bases should only be traded with proper risk management and a thorough understanding of the flat base rules. By adhering to these guidelines, traders can better identify high-potential flat base patterns and increase their chances of success.
What Happens After a Flat Base Pattern?
William O’Neil found that stocks generally move about 20-25% in between bases. So, after a flat base forms, traders may expect the stock to move higher by about 20-25%.
It’s also important to keep in mind that the flat base pattern is not a perfect indicator. There will be times when the stock price does not move higher after the pattern forms. In these cases, it’s important to use stop-loss orders to manage your risk and have a sound trading strategy for getting out.
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