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Why A Flat Base Is Often A Sign Of Big Winner Taking A Break

Even the most fit basketball player has to be taken out of the game every so often for a rest. The fittest players require only a short break before returning to the game in top form.

So it is with stocks. The most powerful leaders will pause every now and then, as if to rest. And when the rest is short and shallow, it's a sign of strength.

That's the story with the . It's the stock market equivalent of a winner taking a breather on the bench, toweling off and sipping water before going on a run of .

It most often arrives after the from a , or saucer with . The stock moves higher, then pauses. On a chart, try to spot it moving sideways for five weeks or more. Anything less does not produce a safe and has a high risk of failure.

The stock generally corrects from 10% to 15%. A deeper correction is not a valid flat base.

The careful chart reader will study the flat base for signs of accumulation, just like any other base.

The breakout must occur on at least 40% above average. A flat base is good for the investor who is kicking himself because he missed the first breakout and wants badly to get in.

It's also a safe place to add shares to a winning position.

Take the 2004 example of Southwestern Energy (SWN), the key developer of the Fayetteville shale oil play in Arkansas and properties in East Texas.

The stock broke out of a cup-with-handle base at 23.77 in March, then moved up 13% over the next five weeks.

Then, it paused to form a flat base over the next seven weeks (1) The base corrected 11% from intraday high to intraday low. Close study of the chart reveals tight areas where weekly closes were little changed (2) The stock found support along its 10-week moving average. These are clues that the big money is accumulating the stock.

The breakout came June 16. Volume that day was 190% above its 50-day average as the stock gained 5% and stormed into new high ground.

The buy point was 27, measured from the high point of 26.90 on the left side of the base, plus a dime. From there, Southwestern built more bases, finally stumbling out of a flawed and topping after a 523% move from the initial flat-base breakout. The move ended in October 2005.