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Consider Wide, Loose Action In Bases A Sign Of Weakness

In any base pattern, narrow price action is a good trait. It also means the opposite: Wide and loose trading is bad form.

When a stock behaves calmly, it suggests that major shareholders have strong conviction in the stock and they want to hang on to those shares. They may be buying even more shares in quiet dealings.

When a stock behaves wildly, it is signaling that investors are unsure about it. Unable to hold buyers' interest for long, the stock can sink and recover in little time.

Indeed, you want bases to be like your children: sober and quiet, not wild and unpredictable.

That begs the question: How wide is wide? How loose is loose

Those are terms that are not easily defined in the subjective world of chart reading, and it certainly depends on the whole base pattern. But there are a couple of red flags to watch out for.

Wide and loose bases tend to be deep. So any correction deeper than 35% should be treated with suspicion.

Weeks with long price spreads from high to low also are danger signs.

In 2011, Abercrombie & Fitch (ANF) was posting strong profits and formed a base from late July through October. The base had a moderate correction of 29%.

But a probe of the week-to-week price activity showed several instances in which the price traveled long distances.

For example, in the week ended Aug. 19 the price swung 28% from low to high. (1) Most bases never correct that much, let alone a single week in a base.

The previous two weeks, as well as the week ended Sept. 23 also were wide-ranging. (2)

The fashion retailer broke out Oct. 24 but was light. (3) It was another indication that institutional investors were not interested in taking on the risk.

Many times, wide and loose bases develop as late-stage bases, when the stock has become obvious and major investors have already made big profits on the shares.

Abercrombie & Fitch technically had reset its base count in 2011, but that didn't take away the fact that the stock had already made several bases from its 2008 low when it formed its wide and loose pattern.

A good chart reader also would have seen that volume in the base was decidedly on the selling side (4), and there wasn't much accumulation at all in it.