Tight Weekly Closes

…I was recently asked about a chart pattern that boasts tight closes at some point in an uptrend. William O’Neil actually named a pattern after this type of market action “three weeks tight”. As I mentioned, the pattern usually forms as the stock has already broken out of the original base. The pivot point is usually long gone but this pattern allows the investor to establish a new position or add to the first position.

You must use a weekly chart to see this pattern as the daily charts will have too much volatility and unnecessary noise that will only confuse you. Look for a stock that has strong fundamentals and has started to stall, closing in a very tight range for at least three weeks. The price will close at almost the exact same point each of the three weeks.

The stock may swing from its weekly high to its weekly low intraday but the most important number is the close at the end of the day on Friday. Make sure the stock doesn’t break any long term support lines such as the 50-d or 200-d moving averages. If the volatility is not excessive, the buy can be considered. After the stock closes the final week (week #3), you may add a new position but make sure you buy a smaller amount of shares than you would at the proper pivot point. If the trade turns bad, always sell and sell fast, cut all losses at a maximum of 7% on this pattern.

Always keep in mind that tight closes in both the daily and weekly charts may provide a clue that institutional investors are buying up shares as the weak investors bail. These institutional investors are holding up the stock as the three week pattern forms.

Another similar pattern is the “railroad-track pattern” which typically occurs near the top of a climax run. If the stock closes the week slightly higher on above average volume, issue a mental red flag. On the weekly chart, this pattern will resemble railroad tracks by closing with two parallel vertical lines. The three week tight pattern is positive while the railroad track pattern is usually negative.

Piranha