Custom Search

Every price trend, be it stock or commodity, takes a breather from time to time. It is a period of indecision when the pressures of buyers and sellers balance each other out. This stalemate most often sets in after prices have jetted upward or plummetted to the bottom of the chart. It is a sign that prices have moved too rapidly and the momentum has been completely absorbed by the prevailing supply or demand.

This change from a trending (advancing or declining) to a consolidating market will usualy be accompanied by a visible increase in volume marking the beginning of the consolidation period. This increase in volume at the latter stage of a trend indicates that the price adjustment reflecting the opinions of traders and investors has reached a peak in either optimism or pessimism relating to the underlying fundamentals. The consolidation or more realistically labeled congestion period is a pause that allows participants to reevaluate the market and sets the stage for the next price move.

Identifying such congestion areas and interpreting the evolving price action to determine the next direction provides tradeable opportunities.

TRADING RANGE

The classic congestion area is a trading range in which prices vacillate between a particular high and a particular low long enough for a chartist to draw horizontal lines through the tops and bottoms. The classic congestion area is a trading range in which prices vacillate between a particular high and low long enough for a chartist to draw horizontal lines through the tops and bottoms.

Although the high and low may differ only by a few dollars, the resulting trading range is evidence enough that buyers see the low price as a bargain and are eager to snap it up. At the same time, sellers see the high price as overvalued and are more than willing to sell.

The typical bullish trading range begins with the price advance ending with a large volume day, representing a temporary buying peak (Figure 1, point A). This buying peak will be attended by positive news. As the good news has been discounted by the advance, however, a round of profit-taking will cause a decline in the market. This selling could be on light or heavy volume. The lighter volume is constructive evidence, as the lack of selling pressure indicates that large interests are still awaiting higher prices. An initial period of selling on heavy volume is not necessarily negative.