Consolidation is a phase when a stock or an index trades within a range. The trend is said to be sideways and may vary depending on the circumstance. Once this range is broken, it may lead to bigger moves, but until the range is intact, the movement cannot be clearly predicted.
Indicators like volumes and technical instruments like Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) assist in the confirmation of a firm breakout.
Key aspects of a consolidation phase Whenever a stock shows a consolidation pattern, one needs to wait for the breakout. The support or resistance levels will indicate the possible reversal points. If the stock holds the levels with decent volumes, then the breakout will show a stable rise. Even the correction, if any, then shows firm upside buying momentum. Huge volumes with high volatility may result in an uncertain movement in price upon the breakout, which shows unstable sentiment.
The price target for the breakout is the difference between the high and low levels of the range. The price may rise further, even to the double of the consolidation range. The time period to achieve the target depends on the consolidation. Longer the consolidation, shorter is the time required to achieve the price target.
Stop loss is the support and resistance levels indicated by the nearing lows and highs. After an established breakout, the stop loss may be shifted to the average of the consolidation range.
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