Consolidation Trade

I think the majority of the money I have made in day trading comes from the consolidation trade. It’s
one of the few trades where you are able to accurately predict your upside. It basically works in all
markets but it is extremely effective in a strong market. It is most prevalent in stocks that are very
strong in the morning.

Synopsis

1. A stock will have a strong upmove in the morning trading session

2. The stock will pullback sometime in the middle of the day

3. After the pullback it will trade sideways in a fairly tight range for a long period of time

4. Look at volume from earlier upmove versus pullbacks. Volume in the upmoves should be
significantly higher

5. Uptrend starts again

6. Identify the middle of the day range. If the stock moves through the upside of the range stock
should challenge high of the day

7. Where to establish a position? Once the consolidation range is established you may want to get a
small position near the bottom. As it begins to trend up add to your position. Add more on any held
bid

8. Take sales close to resistance levels from earlier in the day

9. If stock is moving easily through resistance then most likely will challenge the high.

10. Be prepared to get flat or possibly short at the intraday high

11. Set alerts at the intraday high and the top of the consolidation range

12. After the morning trading session look at the leading gainers for the day. They are all likely
candidates for a consolidation play

How to trade

A) Scenario one involves a stock that has pulled back 1 point from its high and from 1p.m. to 2p.m.
trades in a ten cent range.
a. Set an alert for 1 penny above the top of the range and 1 penny below the bottom of the range
b. If the stock drops below the range observe if it makes a downmove. If it quickly moves back above
the bottom of the consolidation range the you should get long. The dropped bid was likely a
shakeout attempt. Now that it has failed the stock should start to move up.
i. Place a bid through SDOT where the stock is printing.
Hopefully as close to the bottom of the range as possible
ii. If the support drops again then sell your stock.
iii. If the bids start to step up observe whether they are getting hit.
If after a bid gets hit it is followed by another bid at the same price or higher then the stock will move
to the top of the consolidation range
iv. Once the top of the range is breached you should use a Smart
Sweep Buy order to get stock
v. If the stock doesn’t move up at all then sell 1 of your 2 lots
vi. If the stock pulls back below the top of the range sell the lot you bought at the bottom of the
consolidation range. If it is dropping slowly than try to sell it on or close to the Offer.
c. If the alert is triggered when the stock breaches the top of the consolidation
i. If the bid has moved up to the top of the consolidation range then place a bid one penny higher
ii. If your bid doesn’t get hit then observe the prints. If the stock
is printing on the offer then you should pay the offer using a Smart
Sweep Buy
iii. If the bids step up quickly and the offers start to lift then the stock is probably in the early stages
of an uptrend
iv. The stock can now be traded as an uptrend play
d. Where to take profits?
i. You trade it as an uptrend play (previously taught)
ii. You look for resistance levels from earlier in the day as additional points to take sales

B) Scenario two involves a stock that has gapped up from the previous day but there
is no major uptrend in the morning
a. The consolidation in this stock probably will occur earlier in the day
b. Stocks that gap up and move sideways in the morning tend to move higher. Because if the gap up
hasn’t attracted enough sellers for a significant pullback then when a large buyer or buyers step in
the stock will move higher.
c. The best way to find these stocks are to look at the premarket gainers
Click picture to view in full size

Consolidation

January 19, 2009 - Bella's Blogs No Comments 

My views about just trading with charts are well known on our desk. This is the most difficult way to
start your trading career. This is like trading with one hand behind your back. Learning how to read
the order flow is essential for most to be consistently profitable traders. Chart reading is best used to
supplement reading the tape for new traders. Learning how to read the order flow is like adding
LeBron James to your NBA team. Having said that there are charting setups that ought to get your
attention. Let’s discuss one of them.

The day after Steve Jobs announced his leave from AAPL, we traded AAPL. As you can see from
the chart below AAPL could not trade above 81.50 until just before 1 PM. For the entire Open and 2
hours of the midday AAPL could not trade above 81.50. This is significant. Particularly on a day with
such headlines news. There couldn’t have been an equity trader on the Street who did not know that
Jobs was taking a leave. And most good equity traders were trading AAPL.

Finally AAPL traded above 81.50. And AAPL for the next hour traded around 82. This is a great
chart set up. This is an excellent consolidation play. Time is important for those who study technical
analysis. And for those who are not fans of technical analysis I appeal to your common sense. If
81.50 was such an important resistance level of an In Play stock, it is meaningful that AAPL did not
trade back to this level. For an hour AAPL held higher.
Now how to play this trade is a matter of preference. Some will wait until AAPL clearly starts to break
above 82 and looks ready for its next upmove. Scalpers would wait for such a move. Those who rely
most heavily on the tape would wait for such a move. But those who are well versed in intraday
technical analysis, such as Steve, will start a position around 82.

Where to start your position is a matter of feel. Again being able to read the tape will help you
determine the best price to start you position. As you can see from the chart below, AAPL trades
below 82 a few times offering weaker tape reading traders an opportunity to hit the bids. Reading the
tape will help you time when to load up as AAPL is ready for its next upmove. But for even those not
well schooled in tape reading you can start a position around 82.

AAPL is consolidating higher than its resistance level. It is not trading back towards 81.50. It is likely
that the buyers are doing the best they can to buy AAPL as cheaply as possible. The buyers do not
want to start spraying the offers to foreshadow their big buy order. So they will buy a little at 82, drop
it out a bit and buy 90c and 80c. And then they might buy a little above 82 and then drop out to 82,
90c, etc. They are buying around 82.

After the buyers have accumulated the stock they need they will take the stock higher. Starting a
position near 82 makes it easier for you to hold. A position started at 90c, 80c, and 82 is easier to
hold than scalping the offer near 82.33c. Once AAPL moves powerfully above 82 this is another
bullish signal. Try and collect some more shares at favorable prices with this additional bullish signal.
Also if you look at the intraday chart it is clear that volume increases into a lot of the up bars. This is
also very bullish. Between 1:30-2:30 when AAPL moves from 82-84 the volume per minute is
probably double what it was from 11:30-1:30. Find spots to buy more.

A consolidation play is a trade that we teach. Above is a good example. Develop your own system
for trading this play. But add it to your playbook.