Consolidating Stock | New Trader U

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Consolidating Stock | New Trader U


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A consolidating stock is one that forms a trading range on its chart. A stock under consolidation will have defined resistance above price action and support below that acts as barriers to short-term movement. Stocks and markets go through different cycles of uptrends, downtrends, trading ranges, and volatility, the consolidation period is the one where a trading range is formed. It is a normal part of any market cycle to spend time not trending. The majority of time for any chart is spent in a range with only approximately 20% of the time spent in a sustained trend.  

A consolidating stock has found equilibrium where buyers step in to enter at support and sellers step in to exit at resistance. Current supply and demand must be worked through before a chart can resume sustained directional movement in one direction. 

In a wide consolidation swing traders can buy support and sell resistance. In a tight consolidation most traders wait for a break of resistance or support to see which way the chart is likely to move during the next swing or trend outside the current boundaries.  

Consolidating stock

Chart Courtesy of TrendSpider.com

A breakout of the range is a signal for the potential of an end to the consolidation and the beginning of a new trend or swing in price. Breakouts end consolidation moving prices to the upside over resistance signaling a potential uptrend. Breakdowns end consolidation to the downside under support signaling the potential for a new downtrend. 

 



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