Flat Base

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Flat base patterns often form quietly, but the gains they launch can be explosive. These chart patterns frequently take shape when the broader market isn’t making much upward progress.

Flat Base

Flat bases tend to be shallow — no deeper than 15% from top to bottom.

And they can form in as little as five weeks, rather than the usual seven weeks required for other types of bases.

Flat bases sometimes occur after a stock rushes up from a previous base, then stalls. As its price moves in a narrow sideways range, its base looks rather flat on a stock chart.

In many cases, the stock is simply taking a break as it consolidates its gains and prepares to head higher. Think of it as a time when the stock is building up steam to propel its future takeoff.

To calculate the buy point of a flat base, add ten cents to the peak, which is usually on the base’s left side. That 10 cents is just added assurance that the stock has enough emerging strength to decisively rally above its earlier price high.

For example, this chart shows the flat base Wabtec formed during an 11-week period in the winter of 2005.

Webtec

At the time, the Pennsylvania-based maker of rail and freight equipment had recently renewed its license agreements with Japan’s Nabtesco and Mitsubishi Electric Corp., marking the 80th year of their partnership. The two Japanese firms were the sole suppliers of braking equipment in that country’s railway market. They also served China, Taiwan and other Asian markets.

Its earnings growth rate had been in the 50%-plus range for the past six quarters. And its pretax margins had risen sharply in recent years.

The stock cleared a seven-month base in June 2005, and then scaled the charts.

In mid-November 2005 it paused and fell into what would become a flat base. It spent nearly three months carving out that chart pattern, and then broke out of the flat base on Jan. 24, 2006.

Its volume swelled nearly 90% above average that day as it made its big move.

This was the time to buy.

As we discussed earlier, to figure out the best price to buy, you would have added 10 cents to peak of the left side of the base, at $28.98. That gives you an ideal buy point of $29.08.