What Do Oracle, Align Technology, Control4, Arista Share? A Flat Base Breakout

Tablet displaying intraday stock performance

In the cup with handle or double bottom , success of the breakout depends on the way a stock rises and falls within the base.

[ibd-display-video id=2700154 width=50 float=left autostart=true]A third pattern shows that a stock can choose to take neither path before its big move north.

Rather than go on an uptrend or downtrend, the stock moves sideways for weeks or months. This action - or lack of it - becomes what's called the flat base.

This pattern often forms after a stock breaks out of a cup or other base, gains ground for a few weeks, then stalls. Why? The market might not be ready to rally strongly, or is still weak.

A flat base reflects unusual strength. Instead of bending lower, it keeps a steady price level. This action tells you the stock wants to run higher.

When the market finally begins to rally, the stock explodes out of its crouch position. A number of past huge winners began their price moves from the flat base.

A flat base must be at least five weeks in length. It can last much longer than that. Within the base, the percentage decline from the stock's high to low usually ranges within 10% to 15%.

The pivot point, or ideal buy point, is when the stock rises 10 cents above the high in the flat base. Sometimes the price high is found on the left end of the base. In other cases, the high is in the middle of the base or on the right. Just add 10 cents to that price to find the pivot. Buy it as close as possible to that price point. Don't chase it if it's already more than 5% above the pivot.

When the stock drops within the base, institutional investors step in to shore up the stock. The stock doesn't fall much more because investors overall feel comfortable with the stock's current price.

That's exactly what happened with Oracle ( ORCL ). The database and e-commerce software giant muscled out of a seven-month cup-with-handle base on Sept. 3, 1999 (1) . In five sessions, the stock rose 18% and hit new highs, a fine start.

The market, though, acted choppily. From Sept. 13 the Nasdaq tumbled 7% over the next two weeks, yet held up above its 50-day moving average. Two weeks later, it strode to a new high. But the next two weeks saw the Nasdaq fall 10%, and briefly below the 50-day.

Oracle dug in its heels. Growth stocks tend to fall 1 1/2 to 2 1/2 times the correction in the major indexes. Not Oracle. The stock held up above 40 during most of its seven-week flat base (2) . On an intraday basis, it was no more than 15% below its high.

One day after the Nasdaq followed through Oct. 28, Oracle popped out of its flat base, moving higher on heavy volume for seven straight sessions (3) . At the time, Oracle had a 95 Earnings Per Share Rating, as seen in IBD Stock Checkup , an A for SMR and a Relative Strength line in new high ground. The enterprise software group was ranked third among 197 groups.

IBD's TAKE : To spot a good double-bottom base , be alert to markets that show two steep sell-offs in a relatively short period of time. Even leading stocks will mimic such behavior. Read this Investor's Corner column to learn more details about this important chart pattern that can be lucrative for those who master it.

Oracle gained 273% through its March 2000 peak.

Here are three more recent examples of good flat bases that formed in 2016 and 2017 and yielded strong breakouts:

Align Technology ( ALGN ), breakout on Feb. 21, 2017: The nine-week flat base began on Dec. 19, 2016, when the invisible braces marketer peaked at 102.10. Total decline within the base: 13%. Heavy volume was largely absent as Align cleared the 102.20 buy point, yet check out the strong gain on Feb. 1 following quarterly results. Align gapped up 6% and turnover boomed 272% above average. That was a clear sign of strong institutional buying.

Control4 ( CTRL ), breakout on July 12, 2017: Volume powered 305% above the 50-day moving average on breakout day. In small-cap stocks, volume often rockets double or triple average levels. Total decline within the base: 13.5%. Notice on a weekly chart how as the base formed, the 10-week moving average contained the stock's move.

The 10-week line is drawn in red on both an IBD chart and in MarketSmith .

Arista Networks ( ANET ), breakouts on Nov. 14, 2016, and on Feb. 17, 2017: In the first flat base, Arista took the minimum five weeks to complete the base, which sat on top of a much larger first-stage construction. The proper buy point was 87.72. Total decline within the base: 10%.

In the second flat base, Arista vaulted out of the base in a breakaway gap past 103.10. On Feb. 17, the data center networking play opened at 111, 7.7% above the proper buy point. Given the huge opening move and strong fundamentals, it would have been perfectly acceptable to buy right at the open. Arista finished the session at 119.06. Turnover mushroomed to 5.9 million shares, 609% above average. Total decline within the six-week base: 15.2%.

( A version of this column originally ran in the March 26, 2002, edition of IBD. Please follow Saito-Chung on Twitter at @IBD_DChung for additional stock market analysis. )


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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