Today I wanted to write a bit about stock charts, but instead of getting into the commonly referred to (but usually useless) patterns like “head and shoulders,” “triangles” and the like, I wanted to talk about something chart-wise that has helped me to both pinpoint some great buying opportunities … as well as avoid riskier situations.

What is this mystery chart pattern?  Well, it’s not really a pattern at all.  It’s just a manner of trading that is easy to see when you examine a chart.  I’m talking about “wide and loose” versus “tight and right.”  I’m going to explain each below, what they mean, and what they imply for your trading.

Wide and loose trading is just that—a stock that is up 7% one week, down 4% the next, up 4% the week after, and then down 5%.  In other words, the stock is whipping up and down day after day, week after week, as the bulls and bears battle it out.  This situation, especially in a stock that’s had a big run-up in recent months, is a bad sign. (Marvel Technology (MRVL), shown above, is an example of this.)

Why?  Because the stock’s wild ups and downs are telling you that the public’s eye hasn’t come off the stock … something that is needed for the stock to build a sound consolidation.  If everyone is still following and involved in a stock, that means not enough shares have been moved from weak hands to strong hands, so the consolidation phase, at the very least, must go on longer—or it may fail altogether.

Yes, it’s true that some consolidations are going to be a bit wild depending on the market’s action.  For instance, you saw quite a few whippy charts at the major market bottom last March, mainly because the market itself was so volatile.  Even so, you usually saw the best stocks show at least some tightness, as most investors gave up, and professionals moved in.

Tightness is an indication that big-money investors are “in control” of the stock.  They are buying shares within a certain price range, and thus, the stock tends to go straight sideways for a few days or even weeks.  It also tells you that all the weak hands are out; if they weren’t, the swings would be more intense, as described above. (Rovi Corp. (ROVI), shown above, is an example of this.)

So why am I writing about this today?  Simply because recently we’ve seen many of these wider-and-looser patterns form.  Yes, some of that is because of the market itself, which has been spiking up and falling down for the past few months.  But after monster advances during the past year-plus, many of the best-known growth stocks in the market have been sloppily chopping around … a sign most that investors are familiar with their stories and are following the companies on a week-to-week basis.

These patterns are failure prone—when a stock breaks out from this pattern, it usually makes a little progress … but then quickly gets smacked back.  What’s obvious in the market rarely works!  Of course, not every loose pattern will fail (a strong gap up on earnings, for instance, can always change the playing field), but the odds are against it leading to a major, sustained upmove.

The good news is that these wide-and-loose patterns can eventually tighten up.  Usually, after a few failed breakouts, most investors throw in the towel and move on.  Then, assuming business prospects are still compelling, the stock often tightens up, breaks out and begins a new advance.

The moral of this part of the story:  It’s not just whether a stock is generally trending up or down that’s important.  How the stock is acting is also important—if it’s a popular name and is swinging around wildly, don’t be in a hurry to buy.  You’ll usually be better off waiting for a tighter pattern before putting any hard-earned money to work.