Trading Flat Base Breakouts by Bill Pritchar

Trading Flat Base Breakouts

by Bill Pritchard


Here's a look at a simple stock-trading strategy that combines fundamentals and technicals.

The flat base breakout pattern (FBB) is a stock market classic, a time-tested, proven winner. Of all the various patterns, nothing more clearly communicates sudden buying activity than the FBB. A trader who enters a position based on an FBB pattern will likely see profits within a very short time frame. Unfortunately, there are no guarantees in the stock market, and this pattern is no exception. However, by profiling past winners and using fundamental and technical analyses, you can improve your odds of success.

By applying a dual exponential moving average (EMA) as an exit signal, the FBB trader will exit with significant profits in most cases. For the purposes of this article, I will define an FBB as a stock the closing price of which is higher than its highest high over the previous 60 days. In addition, a visual inspection of the chart should show a flat or slightly angled price trend until the day that the FBB occurs. Price action prior to the FBB should be listless, with little volume or activity.

WHAT DOES THE PATTERN MEAN?

The FBB pattern is a graphical depiction of a sudden imbalance in the supply and demand levels in the marketplace and a particular stock. The "flatness" in the price chart indicates low market interest, with prices trading in a narrow band. Volume will also be low, indicating little participation by investors and market players. Then one day, a surge in volume occurs and the price breaks out of its previous flat pattern. On that day, for whatever reason, the stock has new buyers and investors, depicted in both price and volume action.

It should be noted that most FBB patterns, within weeks or months, resulted in a 200% gain or more until the sell signal (discussed later) was obtained. I should further note that "perfect" FBB patterns will only occur every few months, and waiting for them requires much patience. When trading this pattern, you should remember what Jesse Livermore said: "It was never my thinking that made me money but my sitting tight."

...Continued in the January 2006 issue of Technical Analysis of STOCKS & COMMODITIES