First of all i would like to Thank all my visitors for their patience while i was away. I had been swamped with other projects that i work for. I would definitely try to make it a point to actively post articles and thoughts on this blog.
Ok, so how often have you heard the term “Consolidation". I would bet very often. You switch on any channel and the chances are you would hear this word. More often than not, if a stock does not make a move, everybody terms that the stock is consolidating. Is that really true? What is consolidation after all?
Stock Consolidation
In very simple terms a stock is said to be Consolidating if it is Not really trending. Trend here could refer to both, Uptrend or Downtrend. Another way to put it is, if a stock is moving in a Sideways trend, the stock is deemed to be Consolidating.
Let us take an example. Ashok Leyland. Take a look at the Chart.
Ok, so how often have you heard the term “Consolidation". I would bet very often. You switch on any channel and the chances are you would hear this word. More often than not, if a stock does not make a move, everybody terms that the stock is consolidating. Is that really true? What is consolidation after all?
Stock Consolidation
In very simple terms a stock is said to be Consolidating if it is Not really trending. Trend here could refer to both, Uptrend or Downtrend. Another way to put it is, if a stock is moving in a Sideways trend, the stock is deemed to be Consolidating.
Let us take an example. Ashok Leyland. Take a look at the Chart.
Let us dissect the Chart.
Late February of 2007, the stock broke down. Incidentally, before it broke down, it formed a Triple Top in early February taking 2 year chart pattern into consideration.
The stock then tried to come back up, but every move to the upside was curtailed around the 42 mark (circled in blue on the chart).
Every time the stock tried to cross above 42, it met with good resistance and it started it’s downward journey.
Similarly, everytime the stock touched the likes of 35, it found support and the stock started to move back up from that point.
After a couple of such moves between Feb and June, it was an easy 15% pick that any lame person could have made. Why? Because, it was clearly in a Sideways Trend or so called, Consolidation pattern.
Late Sept of 2007, the stock finally broke 42 mark and obviously there were tons of buyers waiting for it to close above 42 so that the consolidation or sideways trend was broken. This is clearly evident from the fact that until late Sept 2007, volumes were just decreasing everyday. However, as soon as the stock crossed 42, volumes just exploded. Stock rallied to 47 within a matter of days. A cool, 12% profit which again, anybody could have easily guessed it out.
Unfortunately, the stock could not hold onto the gains and is again back to the same old consolidation pattern and range. But that is a different topic altogether. What we are trying to understand here is Stock Consolidation and how the stock behaves when it is within this range and outside this range.
How to trade Stocks that are in Sideways trend and Consolidating?
Easy. Once you have confirmed that the stock is in sideways trend, as we did in the case of Ashok around June, you could have easily bought it with a target of around 41+. The stock did reach this level pretty soon. Similarly, if the stock is Shortable, you could have shorted it around late July near 42 for a neat 12%+ profit.
Stocks which are easily identifiable as being in a Consolidation pattern, could be traded with confidence as they would just continue their sideways trend unless something changes. Which of course MUST be supported by huge volumes, either ways.
Types
Consolidation could be sideways, down and even up trend. The bottom line is that the stock MUST stay within the support/resistance lines formed by the Trendlines. In the case of Ashok, it was between 42 and 35. Take a look at the Chart for Ambika that was in a sort of Consolidation pattern to the downside. And once it broke this range, it nearly doubled within a matter of few weeks.
Ashok leyland chart is also said to be in a “Rectangle Pattern". Whereas Ambika is said to be in a “Descending Channel Pattern".
