What Is Consolidation?
Consolidationis the term for a stock or security that is neither continuing nor reversing a larger price trend. Consolidated stocks typically trade within limited price ranges and offer relatively few trading opportunities until another pattern emerges.Technical analysts and traders regard consolidation periods as indecisive and cautious.
Key Takeaways
- Stocks under consolidation trade in a limited range.
- Identifying consolidating stocks involves looking for those that have steady support and resistance levels, trade in a narrow range, and have low trading volumes.
- An important step in trading consolidation patterns involves assessing how long the pattern has held.
- Trading on narrowly consolidated stocks can happen but there is often less room for profit due to the small range.
Stocks Under Consolidation
You can identify a stock that is under consolidation by watching for three simultaneously occurring properties on a price chart.
- The first is that the stock has definable and steady support and resistance levels, much like a flag continuation pattern.
- The second characteristic is a narrow trading range. Be careful, though, because not all stocks and securities have similar volatility. Trading ranges are relative.
- The last feature to look for is a relatively low level of trading volume that does not exhibit major spikes.
Consolidation is neither positive nor negative on its own. Sometimes a consolidation period emerges after a healthy price movement. Traders, careful about possible overbought or oversold positions, may look to smooth out movements before another trend emerges.
Consolidation Breakouts
Once you have identified a consolidation, keep an eye out for any possible breakouts above or below the upper and lower trading range bounds. These breakouts can be accompanied by large increases in volume and lead to large gains or losses in a short period of time, especially if the stock has been in consolidation for a longer stretch of time.
A breakout from a consolidation pattern signals a victory by either buyers or sellers over the other. Standard breakout trading techniques include buying long and covering short when prices break through the resistance level, or selling short and covering long when prices drop below support. More conservative traders look for some confirmation before entering these trades, either through analytical tools or continued price action.
Consolidation Strategies
It is common for a support level to become the new resistance point after a bearish breakout and for a resistance level to form support after a bullish breakout. Sometimes consolidations show triangle or pennant patterns, making it possible to executecontinuation strategies.
Before determining how to trade a consolidation, identify how long the pattern has held. There are no appreciable time restraints on a consolidation. Intraday consolidation can last for only a few minutes or hours. If you look for active intraday trading, consult technical analysis software for dynamic information updates. Some consolidation patterns last for days, weeks, or even months or years. These patterns are susceptible to false breakouts, making it important to seek confirmation of prices before looking to capitalize on a trend.
Countertraders and contrarians can still trade on narrowly consolidated stocks, but there is often less room for profit due to the small range.
FAQs
The Aroon indicators signal a consolidation when both are below 50 and/or both are moving lower with parallel lines. It makes sense that consistent readings below 50 are indicative of flat trading. For 25-day Aroon, readings below 50 mean a 25-day high or low has not been recorded in 13 or more days.
How to identify consolidation in stocks? ›
How To Identify Consolidation
- During consolidation, the price trades in a certain range with subdued volumes. ...
- Technical indicators like RSI and MACD show sideways movement during this phase of the markets. ...
- During consolidation, one can often spot candlestick patterns like doji, spinning top, and hammer.
The Aroon indicators signal a consolidation when both are below 50 and/or both are moving lower with parallel lines. It makes sense that consistent readings below 50 are indicative of flat trading. For 25-day Aroon, readings below 50 mean a 25-day high or low has not been recorded in 13 or more days.
What is an example of a stock consolidation? ›
Example scenario
In the case of a share consolidation in the ratio of 1:5, the 5 shares will be reduced to 1 share. The 10,000 shares will be reduced to 2000 shares. The number of shares reduces, but the overall value of the shares remains the same.
What does consolidation look like on a stock chart? ›
A symmetrical triangle also indicates a period of price consolidation before a breakout or breakdown. The stock trades in the same range for a certain period. Increasingly slower stock trading over time will form a triangle on the chart.
How to identify consolidation breakout? ›
Generally, volume is low while a stock is consolidating, but then increases sharply when the stock breaks out. If volume “breaks out” at the same time the price does, that is a much stronger signal than a price breakout with low participation. Note that, just like everything else, volume is relative.
What is the rule of consolidation? ›
(a) Consolidation. If actions before the court involve a common question of law or fact, the court may: (1) join for hearing or trial any or all matters at issue in the actions; (2) consolidate the actions; or. (3) issue any other orders to avoid unnecessary cost or delay.
How to identify consolidation in TradingView? ›
The basic idea is , 1) Price crosses above upper band , indicated by a color change (green) is the Long condition . 2) Price crosses below lower band , indicated by a color... Consolidation indicates moments of market indecision when there is no shift in price. It is neither positive nor negative.
How to scan for consolidating stocks in TradingView? ›
How to use the indicator:
- Load the script into your market analysis platform (e.g. TradingView).
- Set the desired consolidation length (consol_length).
- The indicator will automatically calculate consolidation based on the specified length.
One of the common strategies to trade in consolidation is to check out for breakout or breakdown. Breakout is when the trend reversal is bullish, usually accompanied by an increase in volume. The resistance level turns into new support. Traders enter a long position when the stock breaks out from the resistance line.
Consolidation of loans is a special form of consolidation. In this process, several loans are combined into one loan. For example, a company that has two current loans with different interest rates can take out a new loan and thereby pay off the other two loans.
What happens in a stock consolidation? ›
A share consolidation reduces the number of shares a company has on issue. This causes the share price to increase proportionally, meaning that the percentage ownership and value of your investment remains the same. Example: You own 100 ABC shares and they are valued at $1 each for a total value of $100.
What happens when a share is consolidated? ›
A share consolidation, sometimes referred to as a reverse stock split, is a process whereby a specified number of shares in a company are merged to form a single share. As a result of this procedure, the number of issued shares decreases and their nominal value increases proportionally.
What does consolidation look like? ›
Lung consolidation is most easily seen on an X-ray. The consolidated parts of your lung look white, or opaque, on a chest X-ray.
What is the difference between a stock split and a consolidation? ›
A reverse stock split also is known as a stock consolidation, stock merge, or share rollback and is the opposite of a stock split, where a share is divided (split) into multiple parts.
What is an example of consolidate? ›
The two funds will consolidate into one. The administration hopes that such measures will consolidate its position. Rebel forces have consolidated their hold on the region.
