WHAT DOES IT MEAN WHEN A STOCK IS CONSOLIDATING?
When a stock is consolidating, it is essentially going sideways. As you remember from our chart above of the four phases of the stock price cycle, there are times when a stock is not rising or falling. Instead, it is consolidating.
What does this mean? It means that some investors are selling their shares, while others are buying. When supply and demand are balanced, it usually results in a stall with the price. Not until someone takes over, the stock moves in both directions.
For example, if a stock is consolidating after a sharp price increase, it may just be a momentary pause during some profit. Later in the consolidation process, the sale stopped and the accumulation of shares continues. So the price continues to rise.
HOW TO KNOW IF A STOCK IS CONSOLIDATING?
You’ll know if a stock is consolidating when it’s limited to range relative to trend. The best way to see it is on a chart or diagram. A trading range is defined by the upper and lower bounds.
A stock may not always exactly meet the upper and lower limits of a consolidation range. However, if it is consolidating, it will most likely return to the trading interval as soon as possible.
Notice how the stock reaches a “buy climax” referred to as BC in the chart above. It then carries on a series of bounces between the ups and downs of the buying climax (BC) and the automatic rally (AR).
After the C-phase distribution event at the highs, the price is marked down and reverses the trend. It is these characteristics that help you understand if a stock is in consolidation.