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Shun The Chart Patterns With Wide, Loose Action

Many musical acts sound great and look fabulous even in their twilight years. Other performers lose their magic in their later albums and tours, becoming erratic and making you wish they'd bowed out sooner.

You could use that state of affairs in thinking about leading stocks. Some leaders just keep going, scoring big advances even from late-stage bases.

But most aren't so fortunate. They achieve huge gains after breaking out from first- or second-stage consolidations, then after that it gets ugly.

So how can you tell if you're seeing a that won't work out

Well, one trait that you often see in unproductive, later-stage bases is volatility. The stock will show a great deal of wide and loose action.

You also could see such choppy movements in early-stage bases that don't lead to nice gains, but it's especially common in later-stage chart patterns.

Wide and loose action refers to numerous big weekly moves up or down in price. The weekly price drops and gains can be in the ballpark of 10% or more, and you also might see wide weekly trading ranges for several weeks.

The volatile action signals a lack of conviction among some big investors. You prefer to see the opposite — relatively quiet trade and tight closes as a base takes shape, indicating solid institutional demand for a stock.

On a related note, you might notice that some wide and loose bases have a V-shaped look. That's another warning sign, since proper consolidations generally have a more rounded appearance on a chart.

But also keep in mind that wide and loose action isn't always a fatal flaw. Sometimes a stock starts to consolidate in an extremely choppy fashion, then tightens up and produces an acceptable chart pattern.

Former leader Research In Motion (RIMM) provided a good example of a wide and loose base with the late-stage pattern it formed in late 2007 to early 2008.

This deep base featured several weekly price swings of 10% to 13%. 1 It took shape after the BlackBerry smartphone maker had already sketched out calmer patterns in the mid-2000s and advanced up sharply from them.