Maintaining a rules-based approach to buying and selling stocks is vital to successful investing. It's important to keep impulses in check and make calculated decisions for an additional edge.
As a quick overview, the best time to buy a stock is when it clears a proper buy point from a base. Once it's moved 5% past the initial entry, it becomes extended, or too late to buy.
However, there are exceptions to this. A stock may go on to form additional add-on buy points after the initial breakout. These allow investors to build a position in a stock over time at optimal points along the way.
Alternative Buy Points: Three-Weeks-Tight Pattern
We're going to review a few alternative entry types, starting with the three-weeks-tight pattern.
Before the pattern forms, you'll likely see the stock rally at least 5%-10% from a proper buy point, then refuse to give up ground. From here, if shares close at nearly the same price for the next two weeks, it could morph into a three-weeks-tight.
If the difference between each weekly close exceeds 1.5%, the three-weeks-tight pattern likely has flaws. But if the difference between each weekly close is less than 1.5%, you can use the highest point in that cluster as your entry and buy as the stock moves above it.
Short Strokes And Shelves
Next, there's the short-stroke pattern, which forms over just two weeks. The first week is marked by a strong advance of 10% to 20% or even more (1) — and usually comes shortly after a breakout from a base.
The second week will show tight trading. The difference between the stock's weekly high and low will be very narrow.
Investors should watch for the stock to rise or fall just slightly in the second week without making a new high. This tame action after a big run-up shows that institutional investors are in no rush to sell.
Then, if the stock clears the high from the big up week after going nice and tight for a week, that would mean the stock has cleared a short-stroke entry. The BlackBerry chart that accompanies this story is a good example
Another alternative entry type is the shelf pattern, which is a small area of consolidation that happens between bases. Most shelves will show declines of well under 10%. It's less about the exact depth and more about seeing a reduction in volatility from the prior base.
A very short five-day shelf should be very tight. In contrast, a four-week shelf might have a small shakeout or two in it. But there needs to be at least one clear area of resistance. A break above this level would mean the stock is actionable.
Downward-Sloping Trendlines And Pullbacks
Downward-sloping trendlines can be found by connecting a stock's recent highs and can yield entries that are lower than traditional buy points.
Trendlines can be drawn on daily or weekly charts. The best trendlines on a daily chart are found when at least a few highs can be connected over a time frame of several months.
Finally, pullbacks to a moving average, such as the 10-week line or the 50-day line are also important to watch out for. Institutional investors often use these levels as a reference point, stepping in to add shares to their positions when a stock pulls back. This is why rising stocks often rebound from their 50-day lines, turning brief pullbacks into follow-on buying opportunities.
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