The strong stock market uptrend in 2021 resulted in a number of big price gains for top growth stocks. One of those was Alphabet, which broke out past a correct buy point in a flat base at the start of 2021, leading to a 63% gain in about 10 months.
The flat base is one of the few bullish patterns commonly formed by top stocks before they make outstanding runs. Found by using stock charts, a flat base is among the chart patterns such as the cup with handle and double bottom that investors should be seeking.
A flat base is easily identifiable, with sideways action for weeks or even months. But don't let the lack of progress fool you: A flat base actually reflects unusual strength. Instead of wilting during a tough stock market environment, the stock holds steady in price, giving up as little ground as possible. This action tells you the stock wants to run higher but is being held back.
When the market pressure lifts and the major stock indexes start to rally, the stock explodes out of its holding position.
A flat base must be at least five weeks in length, but it can last much longer than that. Within the base, the percentage decline from the stock's high to low usually ranges from 10% to 15%.
In other words, let's say you find a decline of 16% or more. That base would not qualify as a flat base, but instead it may fit the mold of a cup with handle or even a cup without a handle.
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Alphabet Stock's Flat Bases
Starting in early December 2020, Alphabet stock corrected just 8% from its 52-week high as it formed a six-week flat base (1) with a 1,843.83 buy point. (This predated a 20-for-1 stock split in July 2022.)
Alphabet stock broke out on Jan. 20, 2021 (2), advancing 5.4% in volume that more than doubled vs. its average (3). At first, the stock had some difficulty gaining traction. But the company's strong quarterly earnings results on Feb. 2 sent shares flying out of the 5% buy area on Feb. 3 (4).
Just two weeks later, Alphabet stock started constructing another flat base, this time with a 2,145.14 buy point. (This was before Alphabet's big stock split last July.) A strong April 5 breakout offered investors another buy point, either to add to the position or start a fresh position.
Finally, the parent of Google traced a third flat base, breaking out in late April past a 2,431.38 buy point.
Alphabet stock's performance in 2021 illustrates the importance of continuing to watch a leading stock even if you miss the original breakout. The stock formed multiple flat bases that led to solid gains. On Nov. 19, 2021, Alphabet shares peaked at 3,019.33, more than 63% above the stock's first flat-base entry.
This article was originally published Nov. 13, 2023, and has been updated. Follow Scott Lehtonen on Twitter at @IBD_SLehtonen for more on growth stocks and how to invest in the stock market.
