BASIC TECHNIQUES
Merging Fundamentals And Technicals
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
Excerpted from an article originally published in the January 2006
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
Return to January 2006 Contents
