Base patterns help identify growth stocks before they break out to price advances. Finding the flat base, one of those bullish patterns, could help you find your next big winner.
A flat base forms as a stock stalls from a prior uptrend and trades in sideways action for several weeks. In some cases, it may emerge following a prior base.
You may find flat bases forming as stocks bide their time in a weak market. The stock consolidates until one day it springboards to new highs.
What Makes A Proper Flat Base
A flat base should be no more than 15% deep from the highest to lowest points. It has to be at least five weeks long to be of proper length, but it can be much longer.
The flat base's buy point is 10 cents above the high of the base. Usually, that high is at the beginning of the base. Once the stock hits this price, watch for the breakout. Price and volume should be noticeably stronger. Volume should be at least 40% above average.
Such was the case with IBD 50 chip design software company Synopsys.
Growth Stock Forms Flat Base Before Huge Move
Synopsys made modest progress from a cup-with-handle base that broke out Feb. 1, according to MarketSurge pattern recognition.
After about a month of lackluster gains, shares pulled back from a peak at 392.79 on April 4 (1). From there, Synopsys started a six-week long flat base with a 392.79 buy point (2) — the same as the prior high.
The growth stock traded in a tight 8% range as it was preparing to explode. Shares wavered around the 50-day moving average as the base formed, but not much below the line. That was positive action.
It finally got the catalyst it needed on May 18 (3), following a strong April-ended quarterly earnings report the prior day. The stock gapped up 8.7% and shot past the buy point in volume 163% above its 50-day average.
Shares pulled back the next three days but never posed a problem for those who bought at the right buy point. Synopsys fund support near its buy point and was in a 5% buy zone to 412.43.
Synopsys then catapulted 9.8% in heavy volume on May 25 after the company announced an accelerated stock buyback. With the move, the stock became extended.
The stock has climbed as much as 19% from the buy point, to an all-time high of 468.03. When the gain reaches 20%, investors can consider taking some profits.
This article was originally published June 2, 2023, and has been updated. Follow Kimberley Koenig for more stock news on Twitter @IBD_KKoenig.
