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 Consolidation and Descending Triangle
formation in CMGI, Inc. (NASDAQ: CMGI).
After a breakout at 38 on August 23, CMGI has pulled back and has been
consolidating.
This consolidation between 40 � and 42 should resolve itself in the next day
or two.
The way to play these tight consolidation patterns is to take a position in
the direction of the break.
I would Short CMGI on a break below 40 3/8.
I would Buy CMGI on a break above 41 7/8.
The market will tell me which way to take the trade.
I would place my stop in the middle of the range at 41 1/8 after entering
the trade in momentum.
