The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Consolidation Patterns
The market value of a stock is a determined by pure supply and
demand battles between Bulls and Bears. This supply and demand is constantly changing on a
minute by minute basis. There are probably hundreds of both rational and some irrational
factors that play into a stock movement.
I believe that stocks move in trends that can last for a long
time. During these major trends, minor counter trends do develop and the trader tries to
take advantage of movement both to the up and down on stocks. It is also very common to
see stocks trade in a range until supply or demand factors resolve themselves.
It is moves from these consolidation areas that present some of
the best trading opportunities. These consolidation patterns can take the shape of
rectangles, symmetrical triangles, ascending triangles, descending triangles, flags,
double tops or bottoms and even triple tops and bottoms, head and should formations and
rounding tops or bottoms.
It sometimes amazes me how the stock market follows the same
crowd behavior and keeps repeating these patterns over and over again. The basic nature of
the markets fear and greed exhibits itself everyday. Let's examine one of these
formations.
Let's look at a rectangle formation in Dell Computer
Corporation, DELL.
The interesting aspect of this consolidation is that it also fit
very well into a typical retracement pattern too.
On June 14, DELL hit a low of 33 �. >From this level, DELL
rallied to start a new uptrend continuing to climb above some resistance at 36 and moved
to a high of 39 7/16 on June 22. The most recent over supply of stock brought DELL down
into the breakout area of 36. This old resistance seems to have become support and demand
at the 36 level still existed.
DELL has been trading in rectangle consolidation area between 36
and 37 for the past week. A break from this base could signal a continuation from the
consolidation area and a move the previous resistance at 39.
I would Buy DELL on a positive open or a break above 37 3/8
during the day. I would place my stop below the base of the rectangle at 35 �.
