U.S. Markets closed

Flat Base Is A Simple Pattern, But It Does Have Fine Details

An investor learning to spot bullish chart patterns might do well to start with the easiest one: the .

As its name implies, a flat base is a shallow price contraction on a chart that forms as a stock digests an earlier advance.

Simple enough, right

Of course, nothing in stock investing is quite so simple. Not every sideways consolidation is a flat base. From IBD's decades of studying successful stocks, here's what is known about the proper framework of the flat base: • It needs at least five weeks to form. Shorter patterns are not adequate enough to flush out weak or impatient shareholders.

Usually, start counting with the first down week on a weekly chart.

• The stock's price declines no more than 15% from its intraday peak to intraday trough. This means that in some cases, the "flat" base has kind of a "U" shape and doesn't look so flat. Yet, it is still a proper base.

• The optimal is determined by finding the highest price in the pattern and adding 10 cents to it.

Usually, that highest price is at the start of the correction.

But every once in a while, a stock forms a significant area that's a bit lower than the prior high. This can provide an earlier entry point.

As with the from other key chart patterns, the stock should clear the buy point in at least 40% above its 50-day average.

Flat bases tend to form as a second or third base in a stock's major advance, following a , or another, larger base. Rarely, flat bases are the first base.

In late 2011 and early 2012, Tractor Supply (TSCO) had all the makings of a good flat base: It had climbed from a cup-with-handle breakout, it corrected 14%, and it consolidated for eight weeks.

The buy point was 78.32 (1) but an alternative buy point could be traced at 75.58. (2) The midcap stock broke out above both in heavy trading on Jan. 12, 2012, in volume nearly five times its average. (3)

The farming supply chain rallied 29% from the higher buy point until it peaked three months later.

When it broke out, Tractor Supply's Rating was a solid 94, meaning that its long- and short-term profit growth exceeds 94% of all stocks in IBD's database. Its Relative Price Strength Rating was 92.