The short-stroke and three-weeks-tight patterns offer shareholders a chance to buy more shares. Aggressive traders may use either to initiate a position.
Both formations indicate a pause in a stock's advance, which may give the impression it's stalling. On the contrary, both can produce powerful breakouts.
The short-stroke pattern is rare. It forms over just two weeks. The first week is marked by a strong advance — 10% to 20% or even more — and usually coincides with or comes shortly after a breakout from a base.
The second week shows tight trading; the difference between the stock's weekly high and low is just a few percentage points.
Watch for the stock to rise or fall just slightly in the second week without making a new high. Such tame action after a big run-up shows that institutional investors are in no hurry to sell.
Research In Motion (RIMM), the maker of Blackberry phones, formed a classic short-stroke pattern starting in the week ended Dec. 26, 2003. The stock rocketed 52% in huge volume (1), clearing a six-week flat base with a 48 buy point (weekly chart reflects a 2-for-1 split in June 2004 ).
Trading was tight in the second week, with the weekly high of 34.74, 5% above the 33.05 low. Volume was light. The stock never passed the previous week's high. Better yet, the second week was an upside reversal.
The buy point was 10 cents above the first week's intraday high, or 35.52. The stock cleared that the very next week, jumping 10% in strong turnover.
From there, Research In Motion nearly tripled over the next year. It peaked at a split-adjusted 103.56 in December 2004.
In contrast to the short stroke, the three-weeks-tight pattern is fairly common. It's formed when a stock closes within 1% to 1.5% of the prior week's close for two straight weeks. Volume will be quiet during this period as the stock consolidates not long after breaking out of its base.
Again, the three-weeks-tight pattern signals that institutional investors are comfortable with the stock's advance. They aren't about to take profits. The buy point can usually be found by adding 10 cents to the highest price in the pattern.
For example, current IBD 50 stock SodaStream International (SODA) completed a three-weeks-tight pattern in the week ended Jan. 18 with a buy point of 50.08. It's nearly 7% above the entry.
Typically, investors should add only a small amount of shares — say, 5% of what would be a full-size position — when the stock clears a secondary buy point. Doing so gives investors a chance to benefit from further gains without taking a big risk.
Make sure the market is in a confirmed uptrend before adding shares at a secondary buy point. And remember to sell shares that fall 8% from the purchase price.
- Investment & Company Information
- Research In Motion