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.

The first mistake is that some investors try to become jacks of all trades … and end up being masters of none.  What I mean is that novices will focus on way too many indicators and time frames.  First they look at the RSI Index and the Slow Stochastic.  Then they add on the MACD.  Then add on 5 different moving averages (including exponential and simple moving averages).  Then they add on Bollinger Bands.  Yikes!

This is just way too much information, most of which will be too short-term and too contradictory.  You should approach reading charts like you should approach learning to golf–you don’t go out and hit every club two or three times.  No, you focus on a couple of irons (or maybe your driver) and try to develop some consistency with them.  Then you work on some other clubs.  In other words, it’s a step-by-step process.

With charts, I can tell you that, to this day, I only have four things I look at regularly–price, volume, two moving averages (25-day and 50-day simple) and relative performance lines (how a stock is doing compared to the market).  That’s it.  Now, I’m not saying my way is THE right way to look at charts, but I just want to show that it’s usually better to have less on your chart.  So keep it simple, especially in the beginning.

Another mistake to avoid is that you should never assume that charts are going to do something they can’t–predict the future with certainty.  Realize the chart is simply a current look at a stock (or sector’s or market’s) current supply and demand situation, not a crystal ball.  Yes, examining charts can help put the odds in your favor, but there are no sure things in the market, and a chart’s picture can change quickly.

In total, chart reading is a skill you need to learn if you’re going to be a successful growth stock investor over the long haul, and keeping things simple, and realizing what charts can do (put the odds in your favor) and can’t do (predict to the day what will happen) will help you get off to a good start in your education.

I don’t think there are any exceptions to this rule.  None.  And if there were, I’m betting that the SEC would probably want to have a nice, long chat with whoever found it.

So my idea for today’s stock is a bit of a compromise.  It isn’t the hottest Chinese stock on the market.  But neither is it a boring Red Chip stock that you have to hold for years to get a good return.

The company is Mindray Medical (MR), which surely has one of the best company names ever.  This Chinese manufacturer of medical devices started out in 1991, making knock-offs of ultrasound and other medical imaging machines.  It took 10 years, but the company concentrated on R&D, and kept finding small, patentable improvements to existing technologies.

It used to be that the only markets for Mindray’s machines were the smaller regional and local hospitals and clinics around China.  But the gradual improvements in both quality control and design coupled with inexpensive Chinese labor soon made the company’s devices attractive to international customers.

Today, China accounts for just 43% of Mindray’s revenue, with the U.S. contributing 16%, and 41% coming from the rest of the world.

Patient monitoring and life support systems are the biggest product line, bringing in nearly half of the company’s sales.  Imaging systems and in-vitro diagnostic products each contribute about a quarter.

Mindray is a great example of a well-run company that has raised itself out of the low-quality, low end of the medical device market.  By spending the money to create intellectual capital, the company has broadened its market.  Q2 results showed a gain of 10% in both revenues and earnings, and the recovering global economy will likely bring back the much bigger gains that characterized 2007 and 2008.

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The chart for MR shows an attractive six-week base at 31 and signs of a breakout in recent days.

All the major indexes are strong.  The Advance-Decline Line is strong.  The number of stocks hitting new lows is minuscule.  And stocks in general do not appear overbought, meaning that while a short-term correction is possible at any time, we do not appear to be at a climax phase.  In short, the charts look great.

As to psychology, the temperature is rising, but there are still doubters, and we are far from euphoria.  So there is plenty of upside left, which means that if you’re still not aggressively invested in this market it’s not too late.

One of my favorite investment areas, because of its growth rate, remains China … and one of my favorite stocks, mentioned above, is “the Google of China,” Baidu (BIDU).

The best coverage of the stock has come from Cabot China & Emerging Markets Report, which back on July 9 said this:

“Baidu is the dominant Chinese-language search engine in China, with a market share that hit 65.8% in 2008.  (Google was second with 22% and Chinese rival Sogou was a distant third with 2.9%.  Yahoo! was an even more distant fourth.)  It is now the third-largest search engine in the world.  For a company incorporated in 2000 and limited almost entirely to operations within a single country, this is a remarkable record. …

“Baidu has built its towering advantage over its powerful competitors by being both imitative and innovative. The imitative part of the Baidu strategy is its total adoption of Google’s paid keyword search as its revenue model.  … The … innovation … has been understanding the Chinese language better than its competition.  According to the language mavens at Baidu, the Chinese language has 38 ways of saying “I,” and an equally bewildering profusion of terms for other topics of interest.  By incorporating a native speaker’s intuitive grasp of the poetry and ambiguity of this rich language, Baidu can deliver the results users want no matter how oddly they may ask for it. …

“Baidu’s future growth is expected to come from the growth of the Internet in China.  Despite the controls and restrictions demanded by the Chinese government–mostly aimed at pornography and politically sensitive topics–the Chinese people are taking rapidly to life online.  China now has more people online than any other country in the world (221 million in early 2008) and estimates put the growth rate at 18% per year, with a target of 490 million users by 2012.  (We note that that’s more Internet users in China than there are people in the U.S.) …

“As usual, don’t let the stock’s high price put you off.  Remember that $1,000 invested in BIDU is exactly the same as $1,000 invested in a stock trading at 10.  It’s the exposure, not the number of shares that matters.”

When that was written, editor Paul Goodwin’s China-Timer, which monitors the health of the Chinese stock market, told him to be cautious, so he rated BIDU a hold.  But just seven days later he wrote to subscribers, “The combination of a new buy signal from the Cabot China-Timer and a breakout on good volume makes this an easy call.  BIDU is now rated buy. The stock failed just above 300 in June, then stalled there again in the first week of July.  A six-day high-volume rally pushing past that old resistance is just what the doctor ordered.  BUY.”

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Since then, the stock has soared 24%, and now it’s building a base at 400.  Of course, this seems like a ridiculously high price to some investors, but it’s clear to me that the folks at Baidu have taken another lesson from the Google playbook.  They’ve learned that leaving your stock’s price high (instead of splitting the stock to artificially bring it down to a level attractive to the masses), means that more shareholders will be institutional investors who (hopefully) will treat the stock more wisely.

BIDU’s 50-day moving average is now at 350 and climbing, and if you wait until the stock and that moving average meet, you could find a decent entry point.

To me, those types of patterns aren’t overly reliable; sometimes they work, and sometimes they don’t.  Instead of trying to predict the future, I prefer to use charts to help with simple supply-and-demand analysis–I look at price and volume first, and everything else second.

With all that said, there is a tenet of technical analysis that is worth remembering:  The longer the base the longer the race.  (The corollary, by the way, is:  The longer the top the longer the drop.)  That’s just a cute way of saying that if a stock, sector or the market as a whole consolidates in a range for a very long time, and then powerfully breaks out of that range on the upside, it’s usually ready for a big run.

The most obvious example of this was the stock market itself back in 1982.  For more than 16 years, the Dow Industrials were stuck below the 1,000 level.  But when the market got going decisively in 1982, it ushered in a long-term bull market that didn’t hit its zenith until 2000.

But most bases aren’t going to last 16 years, and even if they did, who would notice them?  So, when I look at long bases, I’m usually looking for stocks or groups that have gone nowhere for more than a year and have totally worn out the weak hands and the public’s eye has moved elsewhere long ago.  That way, when the buyers truly step in, there is no supply (no ready sellers), resulting in sharply higher prices.

These days, following the 2008 wipeout, there aren’t many long-term bases to speak of; most stocks are buried well below their multi-year peaks.  However, one group has recently broken out of an 18-month base, and I think it has lots of potential.  I’m talking about gold and gold stocks.