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Weekly Closes Can Show True Character Of A Stock

A coach who inherits a troubled program may see the game differently than a fan does.

A fan looks for a win. The coach looks for grit.

A team that loses, but never quits on the field, is showing something far better than the team that gets a lucky break and coasts to a win.

Evaluating a stock is similar. You want to pay attention, not just to the , but to the action within the base. Is the stock acting like a fighter, or folding like a wuss

Begin by paying attention to the left side. That's when the stock was losing. How did it act as it lost ground on the weekly chart? (The weekly chart is preferable because it quiets some of the noise.) What kind of action are we looking for on the chart? We hope to see some negative weeks closing in the upper 60% of the range.

When a stock closes low in the range, it's like a team with a "Why try?" attitude.

However, if the stock reverses off the low, then this is a good sign. Fund managers are stepping in with conviction to buy shares on the decline.

This matters because funds don't have the mentality of a day trader. They are not in it to get a small gain and then head for the exits. They are strong holders. And you don't want a base that is made up of skittish holders. The weak holders will sometimes sell just after the breakout and send the stock back into the base.

It's unrealistic to expect losing weeks to show high closes in every week. However, you do want to see some signs of accumulation, especially near the bottom of the base .

This is true of up weeks too. You want closes that favor the high end of the range.

In May 2006, Crocs (CROX) began forming a base next to its failed IPO base. The breakout notched a 13% gain and then fell apart.

The new pattern halted its downward momentum after three weeks. The next five weeks involved high closes. (1) The absence of and high closes suggested that funds weren't willing to part with their shares.

Eventually, Crocs broke out, clearing a 30.85 in a low and deep . The handle certainly had its flaws, yet also showed tight action. In three weeks, the stock was up 27%, triggering the eight-week hold rule.

At the eight-week mark, the stock showed a 51% gain. (2)