A breakout is not the last chance to buy a quality stock. After it climbs from a base, look for the price action to tighten up for three straight weeks. For Nvidia stock, such a "tight" formation in April signaled that this year's monster run was far from over.
Once a stock breaks out of a proper base such as a cup with handle, double bottom or flat base, it's time to put on a full-size position.
While the stock is still advancing, look for three consecutive weeks of tight action. This means the stock is trading in a small range from highs to lows with little change in weekly closes.
That's the basic outline of the three-weeks-tight pattern. It is defined as three straight weeks in which closing prices are within a 1.5% difference.
The pattern suggests high demand for the stock, as institutions become reluctant to take profits. The buy point is the highest price in the three-week-long formation. Investors can use it to make an initial purchase, but it works best when used to add to an existing position — what's called a follow-up buy.
The addition would be a partial position such as one-eighth or one-fourth of your original purchase, depending on your confidence in the stock. By adding only a small position to your current holdings, it won't raise your average cost basis significantly.
IBD MarketSurge pattern recognition can identify many of these positive formations.
Growth Stock Nvidia Shows Three-Weeks-Tight Pattern
Nvidia was undoubtedly a 2023 Wall Street darling, with its spectacular gain exceeding 200% through July of 2023.
Several three-weeks-tight patterns appeared during that run, but the April setup is a prime example.
Shares broke out of a cup base in January (1) and rose in nine out of the next 10 weeks. Nvidia stock started to stall in March.
Its model three-weeks-tight pattern began the week ended April 7. In the next two weeks, the graphics-chip giant finished 1% lower and then 1.4% higher. The highest price within the pattern was 281.10, which became the buy point (2).
Nvidia stock cleared the pattern in early May, just as it was finding support at the 10-week moving average (3).
Nvidia reported a stellar earnings report that sent shares up over 24% on May 25. By late July 2023, the stock was up about 60% from the April pattern.
The stock formed more tight patterns, including another in June and early July 2023 (4). Nvidia's three straight weeks of price closes less than 1.5% apart made it a variation on the pattern called a four-weeks-tight.
This article was originally published July 28, 2023, and has been updated. Follow Kimberley Koenig for more stock news on Twitter @IBD_KKoenig.
