Looking for a big move? Get ready for this one…
Consolidations occur when the 5
period and 15 period simple moving averages on the 60-minute chart are flat with very little room
between them. Buyers and sellers are constantly battling with neither side
showing an advantage. Usually after a large breakout or a breakdown,
consolidations will set in.
Consider this
as a washout period that will set up a new base for the next breakout or
breakdown.
The Bollinger bands are also
tight and flat as volume will be relatively light. During this period, it is
very easy to get chopped around as stocks will make impulsive pops and drops
also know as head fakes. Unfortunately, traders will usually be chasing the
tops and shorting the bottoms as this is where the most liquidity lies. The
moving averages are very key during these tight periods. It is important to
ignore any spikes until the moving averages start to form a playable trend
channel. In fact, all trend breakouts and a head fakes start off IDENTICALLY.
The difference is that the TREND breakout will eventually exhaust and pullback
to or near the 5 period moving average only to bounce higher, whereas a
HEADFAKE will exhaust and dive right back through the 5 and 15 period moving
averages holding no support. Head fakes usually oscillate between the upper
and lower Bollinger bands.
On Friday we saw a pure
consolidation on the Nasdaq 100 E-mini futures (noodles) after the big breakout
on Thursday. By using the noodles as a lead indicator and seeing a long
consolidation on the 60 minute chart, you can get an idea of the limited scope
of the follow-through on the noodles and apply that assumption to any stocks
that you trade.
As mentioned earlier,
consolidations occur before and after major breakouts and breakdowns. This
means stay on your toes this coming week for another large break to setup
once the 60 min channels start to widen again. I will update on the status of
the consolidations in my next report.
Jea Yu
P.S. Would you like to receive daytrading setups in real time? If so please
click here or call 1-888-484-8220 ext 1 for a free trial to my
Underground Trader Pit.
Jea Yu has been involved with the equities
markets for over 10 years. He
specializes with intraday trading in the U.S. equities and futures markets.
Jea also is co-founder and lead analyst at www.Undergroundtrader.com, voted Forbes Best of the Web for
active traders four years in a row. Mr. Yu has authored
best sellers “The Undergroundtrader.com Guide to Electronic Trading†and
“Secrets of the Undergroundtrader†both published by McGraw Hill and two
videos “Level 2 Warfare and Beating the Bear†from Traders Library. Mr. Yu
has been a guest speaker at the Online Trading Expos and has been
interviewed and quoted in major publications such as The Wallstreet
Journal, Financial Times and USA Today as well as having several feature
articles published in Activetrader Magazine.