The short stroke and the three-weeks-tight may sound like funny names in the IBD lexicon of chart analysis. But if you want to know when to buy stocks to boost your chances of strong gains in your biggest winners, read on.
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Yet both chart patterns, discovered by IBD's founder William O'Neil, succinctly denote a pair of must-learn chart patterns for those who want to scale into a terrific growth stock with follow-on buys and maximize their profit potential. Why?
These two formations do not show up often, especially the short stroke.
But if you've got a stock that has the potential to rise 50% or 250% or more from the correct buy point, why not look for places in which demand is still great, the supply of readily available shares among big shareholders is still low, and the probability of excellent returns is in your favor?
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Both short-term traders and long-term investors may use either to initiate or add to an existing stock 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.
Why The Short Stroke Is Rare
The short-stroke pattern is unusual. 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 solid base.
The second week shows tight trading; the difference between the stock's weekly high and low is typically 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, the maker of BlackBerry phones that later changed its name to BlackBerry (BB), 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 (the 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 unusually light. See how in the weekly chart, the volume bar is sharply below the 10-week moving average line? That's good. Institutions were sitting on their shares that week.
Also, the stock never passed the previous week's high. Better yet, the second week was an upside reversal.
The follow-on buy point was the first week's high, or 35.42. The stock cleared that the very next week, jumping 10% in strong turnover. From there, BlackBerry nearly tripled over the next year. It peaked at a split-adjusted 103.56 in December 2004.
Three-Weeks-Tight Vs. Short Stroke
The three-weeks-tight pattern forms when a stock closes within 1.5% of the prior week's close for two straight weeks. Volume will be quiet during this period as the stock consolidates after breaking out of its base. This signals institutional investors are comfortable with the stock's advance.
Find the proper buy point by identifying the highest price in the pattern.
Remember, these patterns have a higher record of success when the market uptrend is favorable.
Viper Energy Partners (VNOM), a longtime member of the IBD 50, cleared a 40.48 three-weeks-tight entry during the week ended Sept. 21, 2018. Gains from that breakout price barely topped 8% before the stock reversed badly. Why?
Distribution days began piling up in September and October of that year. On Oct. 10, IBD downgraded the current outlook in stocks to "market in correction" (the best time to go to cash and avoid fresh buys). The Nasdaq market was littered with seven distribution days.
Large caps and megacaps, including Apple (AAPL), have also etched this key pattern before cruising to further gains and new highs.
Apple Produces Three-Weeks-Tight
In September 2019, Apple began a prolific run after the stock climbed out of a flat base.
Right after the breakout, shares traded with minor price changes. It seemed the breakout had stalled. But during that time, Apple formed a three-weeks-tight pattern. Shares closed with only a 0.5% price difference the weeks of Sept. 20 and Sept. 27, 2019.
Apple topped the three-weeks-tight formation the next week in heavy volume, and the stock's advance took off for good. The buy point was 226.42, slightly above the 221.37 entry of the flat base that preceded the three-weeks-tight.
This was not a typical example, because in most cases the three-weeks-tight forms after a stock has traveled a distance from the initial breakout.
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. Keep your losses small. That way, you can invest in a better stock or in better market conditions.
A version of this story was first published in the Jan. 28, 2013, edition of IBD. Please follow Chung on Twitter at @SaitoChung and at @IBD_DChung for more on growth stocks, chart analysis, bases, breakouts and sell signals.
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