Trading stocks education - Trading tactics & examples

Technical Analysis Tutorial  by Alan Farley

Consolidations

Sideways Movement Gives Indication of Future Price Direction

A consolidation is a place where buyers and sellers are very closely matched in numbers. As the battle ensues, others notice that the market is consolidating, and begin considering to get on board. As soon as a break from the consolidation occurs, the latent buyers or sellers usually begin taking positions.

There are very many forms of consolidatons (flags, pennants, triangles, etc.). People may debate the actual name of a consolidation formation, but the important thing to remember is that once a security consolidates, it's break from the consolidation will usually occur in the direction of the trend before the consolidation began.

Consolidations also lend themselves to tight stops, thus removing the risk of a large loss if the breakout fails. For instance, once a security has broken out of the consolidation, you can either set your stop just below the breakout level or in the middle of the consolidation (depending on the range of the formation).

As important as the breakout bar is, it is also important to see that a rise in volume accompanies the breakout bar. This indicates strength and is normally required to see a tradable follow-through. This is more true for long positions than short positions, but higher volume is always preferable regardless of the breakout direction.

A counter-trend consolidation for MEDI breaks down in the direction of the previous trend

Volume pours into NSC on the breakout bar

SWK sees volume begin to come into the consolidation before the actual breakout bar - a great indication that the breakout is about to occur.