Consolidation Patterns
These patterns are excellent to use when the markets are reacting to the
number of the day, and as volatile as they have been lately.
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 Compaq Computer, CPQ.
Over the past couple of weeks, CPQ has been trending lower.
CPQ looks like, over the past 2 days, it is trying to find support at these
lower levels.
CPQ is setting up for a breakout trade.
I would play the breakout to the upside or short it if the price breaks to
below this attempted new support area if it fails.
This can be accomplished by Buying CPQ at 20 � if it moves up or
Shorting CPQ if it breaks 19 �.
A stop can be placed at the other end of the channel.
A trader will be entering this trade with momentum and a close stop can be
used here.
