The Basics of Chart Patterns - Volume in Consolidations

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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.

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