What is a Stock Consolidation?

MSW Member Question:
Hi Chris,

I look forward to checking out your website every day and thank you for all the valuable information that you provide. Please let me know what your definition of consolidation is. For example on 1/12/06 you mentioned this about HITT: “This is one to watch and grab at the first consolidation”. What is consolidation….how long does it last? Please explain.

Thank you!

My Answer:
My definition of a consolidation may be different than other traders but I will explain what I am talking about when I use the term. When I say a stock is consolidating, I am referring to a sideways movement or a pattern that is forming some type of base that allows the stock to correct back down to a moving average or support area after a previous up-trend. Hansen Natural consolidated sideways below $90 before the big push last week to complete the $60-$100 run. The pattern was not long enough in time (minimum of 7 weeks) to be considered a flat base so we call it a consolidation. As you can see on the chart below, the first pattern highlighted last for 15 weeks – a true base. The next area highlighted only lasted for 5 weeks, a consolidation in the bigger picture that allowed current stock holders to add additional shares.

Most consolidation areas will have a support level and a resistance level with a breakout on a move above the resistance and a breakdown on a move below the support.

In the case of (HITT), my analysis is looking for a pullback or consolidation towards the support area (the most recent breakout area). As you know, HITT is not on the MSW Index but may offer upside potential if you enter closer to the consolidation area.





Piranha