Consolidation: A Breakdown

By: Tanner Yarton

Hello,

Tonight, I wanted to throw together a little article about one of my favorite price action indicators, Consolidation. As its easily defined, consolidation is the sideways price action of a security. Traditionally, this action is followed by a large move in either the upward, or downward direction.

From a traders perspective, this can be a great setup to look out for to trade, as it offers an easy to spot pattern that is equally as easy to trade. Here’s a few examples below, and how one might trade them.

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FSLR 0.00%↑: As you can see on this monthly chart (each bar represents 1 month), FSLR had about 7 years of ‘flat’ price action. From a long term trading standpoint, a break above the channel would indicate a buy, and below a short. This channel is clearly identified by the subtle peaks and valleys of the price action, indicated by the blue circles.

ADP 0.00%↑: Another great example of consolidation, is the flag style consolidation. Instead of trading in a perfect channel like FSLR, ADP instead begins to ‘coil’ in price. This is generally more powerful than the channel consolidation shown above, as it can make for a more aggressive move in a shorter timeframe after breaking out, like this one.

Note the time frames on both of these charts. 1 month, and 1 day bars. Know this, consolidation happens on any timeframe, in any direction. See below for a final example:

TSLA 0.00%↑: A 5 minute chart example of the flag consolidation. We see a large candlestick at the open, and then the flattening of price action as old buyers step out, and new ones step in.

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In conclusion, every stock run has consolidation, and its wise to take advantage of it when you see it.

Thanks for tuning in to this little lesson. I’ll be sure to do more in the future in between weekly selection posts. Hope this helps!

-Tanner

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