It forms over just two weeks and usually coincides with or comes shortly after a stock breaks out from a base.
The first week is marked by a very sharp advance, typically 10% to 20% or even more, followed by a pause in the second in which the stock trades in an extremely tight range. Volume should be lower in the second week than in the first, and the stock typically doesn't eclipse the first week's high.
The action gives the impression that the stock is stalling, but in fact it can produce powerful gains. That's because such tight trading after a big run-up suggests that institutional investors are in no rush to book profits despite the strong gain.
BlackBerry (BBRY), the maker of Blackberry phones and formerly known as Research In Motion, formed a classic short-stroke pattern starting in the week ended Dec. 26, 2003, when it soared 52% in huge volume and cleared a flat base with a buy point at 24.05 (figures are adjusted for a 2-for-1 split in June 2004).
Trading was tight in the second week, ranging just 5% from the weekly high of 34.74 to the low of 33.05 (1). Volume dropped off sharply and was far below normal. The stock ended the week up 2% but never passed the previous week's high. The second week also shows an upside reversal, a bullish sign.
The buy point was 10 cents above the first week's intraday high, or 35.52. The stock cleared that the next week, jumping 10% in strong turnover. BlackBerry nearly tripled over the next year, peaking at a split-adjusted 103.56 in December 2004.
Secondary patterns such as the short-stroke can also be used by aggressive investors to initiate a position, but doing so is risky.
Investors should buy only a small amount of shares when the stock clears a secondary buy point, perhaps about 5% of what would normally be set aside for a full position. A small purchase gives investors a chance to benefit from further gains without taking a big risk.
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