Flat Base Methodology

The Flat Base is recognized by William O'Neil as 'another rewarding price structure' (How to Make Money in Stocks 3rd Edition P. 133). O'Neil describes it as "usually a second-stage base that occurs after a stock has advanced 20% or more off a cup with handle, saucer with handle or double bottom".

In fact, the flat base can form at any time during a stock's progress, whether it is trending upwards (sometimes called a Rectangle Top) or trending downwards (Rectangle Bottom). Breakouts from a flat base to the upside are strongly bullish, while breakouts to the downside are bearish.

Pattern Recognition

A flat base is a pattern in which a stock's price moves sideways while moving within a trading range marked by overhead resistance and support. The resistance and support lines must be touched at least twice over a period of several weeks, and there should be some alternation between the points where resistance and support are touched.

Volume is not an important feature in the recognition of the pattern, but will play an important role when the pattern breakouts out or breaks down.

A 'Rectangle Top' is one in which the intermediate term trend is upwards before the flat base forms. A 'Rectangle Bottom' is one in which the intermediate term trend is downwards before the flat base forms.

So that there is no confusion between a flat base and the handle of a cup with handle pattern, we screen first for a cup with handle pattern and then assign stocks to the flat base watchlist if they are not already on the cup with handle list.

Rectangle Tops
Definitions and the values required for inclusion in BreakoutWatch.
Term Definition Required Value
Upward Trend
The intermediate term price trend of the stock price is upwards
Positive slope to 200 day moving average.
Latest Close
The price at which the stock last closed
$6.00 and average daily volume of 30,000.
Overhead Resistance
The uppermost intraday high reached before reversing
The lowest intraday low reached before reversing
Trading Range
The difference between the Overhead Resistance and Support levels
> 3% and <=10% of the Overhead Resistance price. The 3% minimum range is designed to exclude merger/takeover candidates
The stock is considered to touch the Overhead Resistance or Support lines if it is within the tolerance percent before reversing.
Resistance Touch
The intraday high is within tolerance of the Overhead Resistance line
Minimum of 2
Support Touch
The intraday low is within tolerance of the Support level
Minimum of 2
Base Length
The length of the pattern measured backwards from the last close.
At least 25 days. there is no maximum, but there must have been at least the required number of touches within the last 60 days.
The stock rises above the Overhead Resistance level on strong volume
Alert issued if intraday price is 1% above Overhead Resistance on projected 1.5 times volume.
The stock rises drops below the Support level on strong volume
Rectangle Bottoms
Definitions and the values required for inclusion in BreakoutWatch.

All terms and definitions are as above, except that the trend will have been downwards for the last 200 days.

Chart Selector Tool
Our Chart Selector Tool allows you to search for flat bases which have other characteristics than those used as the default values for inclusion in BreakoutWatch. For example, you can search for flat bases with shorter base lengths or wider trading ranges.