Consolidation Patterns by Melanie F. Bowman and Thom Hartle
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.