☘️Three-Weeks-Tight Pattern - Anatomy
Anatomy of charts. Episode 7
Table of Contents
1. Introduction
2. Understanding Three Tight Closes
3. Supply and Demand of Three Tight Closes
4. Identifying Three Tight Closes on a Chart
5. Trading Strategies Using Three Tight Closes
6. Tips for Using Three Tight Closes
7. Potential Pitfalls of Using Three Tight Closes
8. Examples of Three Tight Closes
9. Conclusion👋Introduction
Let's take a closer look at the three tight weekly closes and how this pattern can be used to make profitable trades in the stock market. The pattern is observed in best growth stocks during their advance stage.
🤓The Anatomy Series Schedule
Episode 1: Market Cycle
Episode 2: High Tight Flag
Episode 3: Flat base
Episode 4: Cup and Handle
Episode 5: Double Bottom
Episode 6: Saucer Base
Episode 7: 3 Tight Closes
🤓Understanding Three Tight Closes
Three tight closes is a technical analysis pattern that occurs when a stock closes at the same price for three consecutive weeks. The pattern suggests a period of consolidation before the stock moves in a new direction, either up or down. In order for a pattern to be considered a three tight close, the closing price must be within 1% of the previous two weeks' closing prices, but of course the tighter the better.
🤝Supply and Demand of Three Weeks Tight Pattern
Three tight closes are important because they signal a period of indecision in the market, during which buyers and sellers are fairly evenly matched. Price level where this occurs have been referred by Jessie Livermore as the 'line of least resistance'. Once the period of consolidation ends and the stock moves in a new direction, there is often a significant move in that direction. When a stock is showing price tightness that results to the upside, then we have the footprints of a true market leader. By identifying three tight closes, traders can prepare to take advantage of this solid price run and make profitable trades.
🆔Identifying Three Tight Closes on a Chart
Identifying three tight closes on a chart is relatively easy.
Weekly: We focus on the weekly chart as it is easier to identify.
Tight action: Traders should look for three consecutive weekly closes of nearly the same price. Closing values have to be very tight, nearly unchanged. The rules is within 1-1.5% of each other.
Volume Dry Up: Prefably the volume during the tightening period is low
3+ weeks: Stocks can also perform a Four-Weeks-Tight pattern but ideally there are only three weeks before a breakout. Sometimes such formation can occur within the base, but it is rearer. Once the tight pattern is confirmed on 3 straight weeks you would want to go on the daily timeframe to find the exact buy point.
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🤑Trading Strategies Using Three Tight Closes
Traders can use three tight closes to make profitable trades by taking a position in the stock once it breaks out of the consolidation period. On the daily chart the pattern will not show much of a price tightness, in fact the behavior suggests volatility. However, we use the daily timeframe as it would be easier to identify the resistance and support based on the 3 weeks tight. It is best the first purchase as it breaks through the pivot of the resistance and start initiate a position. Of course, I never jump the gun with full size position but buy as the overall demand is clearing outweighs the supply and the price level moves up. Example of the entry point of a three week tight pattern is shown on the picture below where the red line shows a break of a trend-line and a break-out. Traders can set stop-loss orders at the bottom of the consolidation period to limit losses if the stock does not move in the expected direction.
💡Tips for Using Three Tight Closes
Traders should use other technical analysis indicators to confirm a breakout before taking a position in the stock. As the breakout occurs you expect it to run up and shoot straight up and preferably on a strong weekly volume. Here are some tips how for this pattern:
Pattern: Look for stocks that have a history of forming three tight closes against prior weeks. These stocks are often accompanied by top notch fundamentals and a solid business model. Some popular examples of this pattern will be covered below.
Volume: When identifying three tight closes, pay attention to the volume. Volume is often overlooked by traders but strong volume should signal your light bulb. A stock that experiences a surge in volume during the three tight closes period is a good indicator (preferably +40% on the 50DSMA volume) that institutional investors are buying in, which can be a good sign for future price movement.
Other signs: Use other technical indicators to confirm your chart patterns analysis. Look for confirmation of bullish signals such as breakouts, moving averages, and trend lines. By doing so, you can increase your chances of a successful trade. As more signs pile up you can initiate a follow up buy.
General market: Pay attention to the market overall. If there are major market top signs or bad economic conditions then the probability that this consolidation pattern will result to the upside is lower. The broader market conditions can have a significant impact on individual stocks, so it's important to consider the overall market when making a trade.
Patience: Be patient and don't jump in too quickly. It's important to wait for confirmation that the stock is trending upwards before buying in. Don't rush into a trade just because you see three tight closes - other factors need to be considered as well.
Monitor: Monitor your position regularly. Once you've established a position, it's important to continue monitoring the stock to ensure it's still exhibiting positive price movement as the stock climbs up. If the stock pulls and starts to trend downwards, it may be time to exit the trade.
Discipline: Keep in mind that not all three tight closes are created equal. Some three tight closes may be a strong bullish signal, while others may not be as strong. It's important to consider other factors and use technical analysis to confirm your suspicions.
🚨Potential Pitfalls of Using Three Tight Closes
Traders should be aware that not all three tight closes will result in a profitable trade. Sometimes the pattern will signal indecision in the market, but the stock will not move in a significant direction after the consolidation period. Traders should also be aware that other technical analysis indicators can contradict three tight closes, and should not rely solely on this pattern to make trades. Ideally the stock tightness happens above the 50D SMA and there is a prior run up of at least 30% before the stock start to consolidate. This would show signs that there are institutional investors into the stock. Here are the major pitfalls:
False breakouts: It's important to remember that just because a stock appears to be breaking out of a consolidation pattern with three tight closes, it doesn't necessarily mean the breakout is genuine. False breakouts can occur, leading to losses if you've entered a position based on the pattern. Keep an eye on trading volume and watch for confirmation from other indicators before making a trade.
Whipsaws: The market can be unpredictable, and this is especially true with volatile stocks. A stock that appears to be trending up with three tight closes can quickly reverse direction and leave you with losses. Consider using stop-loss orders to help limit your exposure to sudden reversals.
Volatility: The 3 weeks tight action might be too volatile to take position. This mgiht happen if the technical stop loss might be further than 10% away from the buy point. In this case, even though the technical pattern might be good position sizing rules will be violated.
📖Examples of Three weeks tight pattern
As mentioned earlier, a stock that has three tight closes can be a signal that the stock is under accumulation and potentially ready to make a big move upward. In this section, we will take a closer look at some examples of three tight closes.
Chipotle Mexican Grill ( CMG 0.00%↑ )
CMG is another example of a stock that had three tight closes. As you can see from the chart below, the stock formed a three-week tight pattern in early 201o. After the three tight closes, the stock had a big move upward and continued to climb for several months. The overhead supply a year back is not relevant so we are not worried about it.
After breaking out of the Cup with Handle CMG created a 3 and 4 weeks tight pattern on the top of the handle. What is important here is that this is happening on top of the base (Cup with Handle). This indicates athat market players are not lookin to give in the price event at this highest price. Closes are nearly unchanged. Then it oves up and creates the weekly price closes tight for the next 4 weeks - again on top of the previous close. CMG is a major makret stock and this really suggests that investors are expecting company's future to be positive.
Netflix ( NFLX 0.00%↑ )
Another example of a stock that had three tight closes is Netflix (NFLX). As you can see from the chart below, the stock formed a three-week tight pattern in mid-2018. After the three tight closes, the stock had a big move upward and continued to climb for several months.
Starbucks Corporation ( SBUX 0.00%↑ )
The first example we will explore is the chart of Starbucks Corporation (SBUX). In early 2021, the stock formed a three-week tight pattern after breaking out of a base. As you can see from the chart below, the stock had a big move upward after the three tight closes.
As you can see from these examples, a stock that has three tight closes can be a signal that the stock is under accumulation and potentially ready to make a big move upward. It is important to note that not every stock that has three tight closes will have a big move upward, but it is definitely something to keep an eye on. By analyzing the charts and identifying three tight closes, traders can potentially identify stocks that are ready to make big moves and position themselves for success.
🤓The Anatomy Series Schedule
Episode 1: Market Cycle
Episode 2: High Tight Flag
Episode 3: Flat base
Episode 4: Cup and Handle
Episode 5: Double Bottom
Episode 6: Saucer Base
Episode 7: 3 Tight Closes
Episode 8: Chart Pattern Cheat Sheet
🏁Conclusion
Three tight closes are a useful base pattern in you trader toolbox that can be used to make profitable trades in the stock market. Traders should be aware of the potential pitfalls of using this pattern and should use other technical analysis indicators to confirm a breakout. By understanding and using three tight closes, traders can increase their chances of making profitable.
While considering 3WTC - One of the important considerations that is "The highest range within the last three weeks should be less than 10%." is not included in the above article. Any reasons or should we overlook this consideration?
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