This year's stock market uptrend has resulted in a number of big price gains for top growth stocks. One of those is Facebook stock, or Meta Platforms, which broke out from a flat base in mid-March, leading to a 47% gain in a little over three months.
The flat base is one of the few bullish patterns commonly formed by top stocks before they make their price runs. It is among bases such as the cup with handle and double bottom that investors should be seeking to identify the best time to buy.
A flat base is easily identifiable, with sideways action for several weeks or even a few months. But don't let the lack of progress fool you: A flat base actually reflects unusual strength.
In a weak market, the stock holds steady in price instead of wilting with the rest, giving up as little ground as possible. This action tells you the stock wants to run higher but is being held back by the weak market conditions.
When the market pressure lifts and the major stock indexes start to rally, the stock surges out of its holding position.
Even when the market is in an uptrend, a flat base serves as a pause from which the stock can extend its longer-term advance.
A flat base must be at least five weeks in length. The percentage decline from the base's high to low usually ranges from 10% to 15%, with a maximum depth of 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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The buy point is the prior high, or the start of the flat base. On the breakout, the stock should move convincingly above it in volume at least 40% above average. The stock should have a prior uptrend of at least 20% before creating the base.
Facebook Stock's Breakout In 2023
Following a Feb. 2, 2023, earnings-fueled 23% surge, Facebook stock corrected around 15% from its Feb. 2 high as it formed a five-week flat base with a 197.16 buy point (1), according to IBD MarketSurge chart analysis.
Facebook stock broke out on March 15, rallying 1.9% in volume that was about 25% above average (2). The following session gave the breakout more conviction. Shares jumped 3.6% in 50% above-average volume (3).
At first, the stock had some difficulty gaining traction. But the company's strong quarterly earnings results on April 26, sent shares flying out of the 5% buy zone the next day.
Meta stock's performance in 2023 illustrates the importance of continually searching for top stocks, especially after big moves off their lows. The stock rallied 124% off its Nov. 4 lows before the formation of its flat base. On June 26, Meta shares peaked at 289.79, more than 40% above the flat-base entry.
This article was originally published June 30, 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.
