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Sunday September 07, 2008 |
Volume in
Consolidations
One of the lessons from the previous section is
that large changes in price often occur after a decline in volume. Again,
this makes good sense. A slowdown in volume (and narrowly defined trading
range) is almost always the result of indecision on the part of investors.
When they cannot come to consensus about fair value volume slows and the trading
range narrows as most investors move to the sidelines and await further
data. When there is sufficient data to come to a conclusion about future
prospects volume expands and a large price move transpires. In most cases,
technicians will call the slowdown in volume a consolidation.
On daily price charts consolidation patterns can
last several days, several weeks or several months. They are most often
rectangular in shape but the geometry is immaterial. The fact is that
consolidation patterns are direct results of investor indecision and they are
almost always followed by large price explosions.
Consider this example for Dell Computer
(DELL). There was a time when Dell Computer was a must own stock for
growth oriented money managers but all of this changed in the winter of 2000
when some investors began to doubt that computer markers could turn-in good
profits in the face of slowing demand and rising competition from handheld and
other devices.
In November of 2000 Dell Computer began a decline
that would see the stock ultimately almost cut in half over the course of just
seven weeks. The stock peaked at $33 and sank to a mere $16.75 in late
December. At the time very few investors probably understood that the
stock would remain mired in this trading range for most of the next
year. In fact, Dell Computer became entangled in a triangular trading
range (wedge) that saw prices narrow and trading volume collapse as investors tried to
make sense of the outlook for computer hardware in a slowing economy and the
aftermath of the technology bubble. By the middle of April 2001 Dell Computer
had rallied to $31 only to falter once again to $22.60 in the middle of June.
During this entire consolidation period trading volume slowed progressively.
Price consolidation is
a necessary stage for all stocks. The period that follows
consolidation is breakout and this can be the most exciting phase
for any stock. Let's examine volume during this phase.
volume
in trends 
volume in
breakouts
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Home > Education > Technical Analysis > Chart Patterns > Basics > Volume in
Consolidations 
