Technical Analysis 101: Consolidations

Updated: Jun 21


Thanks for taking the time to read today's blog post where we look at price movement through the use of technical analysis to make money in the market and why we spend time being patient in the market.


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Many people and market participants when starting out think you just buy an asset and it immediately goes up and down! Magic! Especially if you look at most Crypto meme videos where there are huge red candles or green candles it can be very misleading. Don't fall into this trap!


Why?


In reality, what actually happens are consolidations between ranges that form the patterns that we look at in order to buy or short the asset that we are looking at.


So what exactly is a consolidation?


Investopedia.com refers to a consolidation as an asset oscillating between a well-defined pattern of trading levels. A consolidation is generally interpreted as market indecisiveness, which ends when the asset's price moves above or below the trading pattern.


On longer time frames in very strong stocks we get a breakout -> consolidation -> breakout -> consolidation and another breakout.


At some point these consolidations can become headwinds for an asset or in the case below, a cryptocurrency. So, it should be understood that not all consolidations are bullish and some create what's called a distribution phase of that market.


This happened in Bitcoin recently when there was news of Tesla entering the market (which created wave 4 of 5 in the Elliot Wave Analysis on the daily chart) and then announcing they had liquidated some of their position as well.


Bitcoin Distribution Consolidation
Bitcoin Distribution Consolidation (Daily Chart)

This last phase recently in the market foreshadowed a top, this consolidation actually led to a bearish pennant pattern in the market (between the black lines above) that took almost 24 days to confirm. So, if we wanted to be long, short or sell long term positions we had plenty of time to let the market and price tell us what to do.


Over the past month we have created another consolidation that is bullish for Bitcoin. We had a false breakdown below $32,000 which was very bad for anyone that was short or bearish on Bitcoin. We'll cover reversal patterns like this later, just not they can be vicious and a great way to enter or exit positions.


Bitcoin Bull Flag created over the past 30 Days
Bitcoin Bull Flag created over the past 30 Days

We can start to see that consolidations happen often and portend larger directional moves up or down in the markets, this why a lot of time in the market is spent studying the charts and looking for the patterns that are going to create money making opportunities. These patterns even develop over shorter periods of time as well as we can see on the daily chart of $NVDA we posted yesterday on Twitter and in the chart below.


For options traders (for advanced technique traders only) seeing these tight consolidations over shorter periods of time can lead to big money making opportunities. Nivida has been a stellar chart, especially within the semiconductor space recently, but as always we exercise discipline when getting into positions and taking gains.


Hope you enjoyed this piece on consolidations, it's a part of the way to time markets and buy breakouts or sell and short breakdowns. As you start to realize great trading means you become mechanical, you don't force trades and patience is the name of the game during consolidations. Thanks for reading and if there is something that interests or you would like to know more about drop it in the comments below!

Trade Confidently,


Miguel Ferreira (@wizdaytrader)




Essex's Trading Quote of the Day (QotD)


“Patience is not the ability to wait, but to keep a good attitude while waiting."


Stanley Druckenmiller


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