Stocks & Commodities V.

24:1 (46-49): Trading Flat Base Breakouts by Bill Pritchard

BASIC TECHNIQUES

Merging Fundamentals And Technicals

Heres a look at a simple stock-trading strategy that combines

fundamentals and technicals.
by Bill Pritchard
he 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

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JOSE CRUZ

Trading Flat Base Breakouts

Stocks & Commodities V. 24:1 (46-49): Trading Flat Base Breakouts by Bill Pritchard

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.

PROFILING PAST WINNERS

I went back to March 2003 through the present, and researched
all the successful FBB patterns. I studied these stocks from both
fundamental and technical perspectives to see if there were
any common traits and behaviors among them.
The following characteristics were common amid the
profitable FBB patterns:
Total number of outstanding shares less than 30
million, commonly less than 15 million
Average trading volume, typically obtained on Yahoo! Finance, prior to FBB day, less than 250,000
shares a day. In rare cases, an average volume of up
to 500,000 shares a day can be accepted if strong
credentials exist in other areas to justify buying the
stock
Investors Business Daily Group Relative Strength
rating of B or higher
Insider ownership of 15% or more, typically 25%
or more
Volume on breakout day typically five times or
more than the average volume
If no obvious news is associated with the FBB, this is
better than an FBB with news, which might cause the
entire world to jump into a stock. A breakout with no
news likely indicates smart money is buying up
shares. News searches can be performed on Google
News or Yahoo! News, and so on
Prior price and volume action should be lackluster
and flat
Classic price/earnings ratios, earnings reports, and
so forth not used to trade this pattern
The FBB with the overall stock market in a confirmed bullish condition
No overhead supply above the FBB price over the
previous 12 months, and
All were NASDAQ stocks.
If you familiarize yourself with this profile, you can
narrow down your list of possible stocks to buy. Sometimes
(especially in the early stages of a new bull market), you are

likely to have a list of multiple stocks that could be FBB

candidates. But that list can be whittled down to a few
potential stocks.

GETTING THE FBB CANDIDATE LIST

The following is from the scan I use on StockCharts.com. These
criteria can be applied to all the major technical analysis software
with some programming or EasyLanguage formatting.
For the last market close, NASDAQ stocks with:
Daily close for today is greater than maximum close
over 60 days, starting yesterday
Daily close for today is less than $50
Daily close for today is greater than daily open for
today
Daily close for today is greater than or equal to 2
63-day exponential moving average of volume for
yesterday is less than or equal to 500,000
Daily close for today is greater than daily close for
yesterday
Daily volume for today is greater than or equal to
minimum volume over 60 days (starting today)
multiplied by 5, and
Daily volume for today is greater than or equal to
daily volume for yesterday, multiplied by 3.

TRADING THE FBB

Once you have your candidate list, you can use the profile
to narrow down the list to a few potential winners. Stocks in
stronger industry groups should be moved to the top of the
list, as studies have shown that industry group rankings have
tremendous influence on an individual stocks price action. If
two close ties exist, I recommend trading the stock with the
higher relative strength. If the two ties have identical relative
strength (not uncommon), trade the one with fewer shares
outstanding.
After you identify the FBB stock you want to buy, take that
days high and place a buy-stop market order for the next
market day, with that order price approximately 25 cents
above the previous days high. Why? Because you want to
confirm that the new trend is actually going to continue, and
that the action on the breakout day is indeed going to happen.
So if the stock dies the next day, your order will not get
activated, and you are safe to trade another day. However, if
the trend continues, the stock price will climb up and go
through your order price, activating your trade, thus putting
you into a likely successful FBB.

Nothing more clearly communicates

sudden buying activity than flat base
breakouts.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 24:1 (46-49): Trading Flat Base Breakouts by Bill Pritchard
15- Jan-2004 O: 16.42 H: 17.06 L: 15.48 C: 15.70 V: 970.2k Chg: -0.78

Cal-Maine Foods Inc. (CALM) Nasdaq Nat Mkt.

CALM Daily
EMA (3) 15.84
EMA (6) 15.89

I should note that in

all the previous FBB
patterns studied, most
sell signals did not
occur until 14 to 35
days after the
breakout day.

10.0
7.5
5.0

Volume 970192, EMA (60) 1165165

Jun 9

4M
3M
2M
1M

16 23 Jul 7 14 21 28 Aug 11 18 25 Sep 8 15 22

Oct 6 13 20 27 Nov 10 17 24 Dec 8 15 22 2004 12

FIGURE 1: FBB IN ACTION. On November 11, 2003, the stock price of CALM broke out of a flat base on high volume.
This was the beginning of a strong uptrend. The exit was when the three-day EMA crossed below the six-day EMA.

14-May-2004 O: 8.05 H: 8.17 L: 7.82 C: 7.85 V: 2.0M Chg: -0.20

Internet Pictures Corp. (IPIX) Nasdaq Nat Mkt.

IPIX Daily
EMA (3) 7.95
EMA (6) 7.90

25
20
15

Once in the trade and showing a

profit, I like to use a dual EMA to
identify my exit. The EMA should be
based on closing prices. I backtested
various EMA pairs, and found that a
three-day and a six-day EMA, when
used together, work very well to keep
the FBB trader with the trend. The sell
signal occurs when the three-day EMA
turns down and goes below the sixday EMA. I should note that in all the
previous FBB patterns studied, most
sell signals did not occur until 14 to
35 days after the breakout day. As
such, FBB traders should plan on holding onto the stock for two to four
weeks at a minimum. Once the 3/6
EMA cross occurs, you should sell the
stock the next day at the regular market price.
Some examples of actual stocks I
purchased are listed in Figure 4, with
FBB dates and sell signal dates. Refer
to Figures 13 for further study.

10

Volume 2013716, EMA (60) 9320293

60M
40M
20M

2004

12

20

26

Feb

17 23

Mar

15

22

29 Apr

12

19

26

May

10

FIGURE 2: UP, UP, AND AWAY. On March 29, 2004, prices of IPIX jumped way above the price level of the previous
two months. This was accompanied by higher than average volume. When the three-day EMA crossed below the
six-day EMA on April 16, 2004, the exit was made.

Magal Security Systems. (MAGS) Nasdaq Nat Mkt.

MAGS Daily
EMA (3)22.91
EMA (6) 24.53

26-Apr-2004 O: 21.15 H: 22.71 L: 20.00 C: 21.76 V: 3.9M Chg: -0.43

35
30
25
20
15

10

Volume 3890826, EMA (60) 3193102

15M
10M
5M

2004

12

20

26

Feb

17

23

Mar

15

22

29 Apr 5

12

19

26

FIGURE 3: ANOTHER SUCCESSFUL TRADE. MAGS saw a sharp jump on March 13, 2004, and with above-average
volume. It wasnt until April 21, 2004, that the exit was made. Overall, it was a very successful trade.

Copyright (c) Technical Analysis Inc.

STOCKCHARTS.COM

Your next concern is the exit. Immediately after buying the stock, place
a sell-stop market order 7% below the
trade execution price. This is just in
case things go wrong, which means
you must get out. The chances of a hit
are exceedingly slim, and the stock
will begin a climb over the next few
days.

20.0
17.5
15.0
12.5

Stocks & Commodities V. 24:1 (46-49): Trading Flat Base Breakouts by Bill Pritchard

CONCLUSION
It is my hope you will find this article useful in your trading.
I have found that my method has improved my trading
results significantly. I hope it improves yours too.
Bill Pritchard is a professional pilot and active private trader,
with about 10 years of investing and trading experience. He is
currently studying for the Chartered Market Technician (CMT)
Level 1 exam, and operates a website dedicated to technical
analysis at http://www.afterburnercapital.com.

SUGGESTED READING
Jiler, William L. [2003]. How Charts Can Help You In The
Stock Market, McGraw-Hill.
Kaufman, P.J. [1998]. Trading Systems And Methods, 3d
edition, John Wiley & Sons.

STOCK

BUY SIGNAL

CALM
IPIX
MAGS

FBB on 11-10-2003
FBB on 03-29-2004
FBB on 03-15-2004

SELL SIGNAL
Sell signal on 01-02-2004
Sell signal on 04-16-2004
Sell signal on 04-21-2004

FIGURE 4: RESULTS OF TRADING THE FBB ON A FEW STOCKS. Notice that

the time in a trade was a few weeks.

ONeil, William J. [1988]. How To Make Money In Stocks,

McGraw-Hill.
_____ [2003]. The Successful Investor, McGraw-Hill.
Weinstein, Stan [1988]. Secrets For Profiting In Bull And
Bear Markets, McGraw-Hill Professional Publishing.
See Traders Glossary for definition

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