If there is a technical term that can generally describe the state of the market at present, according to a colleague, is the word “consolidation.”
Consolidation, as used in technical analysis, is a trading pattern affecting the movement and direction of a market or a stock’s price. The flux of buying and selling is confined within a trading barrier or channel that is visibly moving in a largely sideways direction.
This may explain why most references regard consolidation as “a period of indecision.” It does not have a clear trend or clear path of advance or retreat. It just bounces within a trading range.
To quote references, consolidation can happen at any time interval that “can last for minutes, days, months or even years.” It only ends when the movement of the market or stock’s price breaks out of the trading pattern. The period at which it occurred is known as a “base.”
It is also one of the four basic categories of formations in chart theory, which—in addition to consolidation—are trend, reversal and breakout.
As implied by its description, it has an upper and lower limit within which the movement of the market or price of the stock is confined. These are called the support and resistance lines.
The support line, in consolidation, is characterized by the presence of enough demand or buyers to sustain the market or price of the stock from falling lower.
Conversely, the resistance line is where supply or sellers prevail to meet demand or buyers, preventing the market or the price of a stock from rising beyond the trading barrier.
Accumulation and distribution
There are actually two operations that are working in a consolidation. These are the process of accumulation and distribution.
Particularly in consolidation, accumulation happens when demand absorbs all available supply. This is different from any common type of demand, for demand here is supported by “strong hands” or by funds that can be invested over the long haul.
Distribution is the opposite of accumulation: supply overcomes demand as there is not enough demand to absorb available supply.
Demand is supported by buyers who do not have enough holding power or that their investible funds are simply short-term.
As said earlier, one of these forces will eventually prevail: Accumulation will result into a “breakout” or upward movement while distribution will result into a “breakdown” or falling of the market or of the stock’s price.
Needless to say, being able to detect which of these forces are at work and eventually prevail is one big key to one’s trading success.
Let’s try to look at the performance of the market recently to see which of the two forces are working. The market again sustained a weekly loss of 51.98 points or 0.81 percent when it closed last Friday at 6,339.26. This was on top of the weekly loss of 90.59 points or 1.40 percent it suffered the week before as it closed at 6,391.24.
Notice that the market barely moved within the last two weeks. And if you look closer at its trading range, the market was pulled down every time it crossed over 6,500.
The same behavior was also observed in the market’s performance for the week of March 3 to 7, albeit the market ended with a weekly trading gain of 56.84 points or 0.89 percent. It was unable to go beyond 6,500 but did not drop below 6,300.
This behavior of the market in the last three weeks gives the impression that it is indeed probably in some form of consolidation. But which of the two processes is operating is still a question mark.
Identifying the divergences between market volume and value turnover or between the price of a stock and its volume is the recommended approach to determine which of the two forces are operating.
The main rule of the method claims that “the occurrence of many up days with high volume in a downtrend could signal that demand is starting to increase.” It is incidentally the underlying rule for accumulation.
Bottom-line spin
If we are to take into consideration how the market has been performing all the way back in January, the market is indeed moving within a trading range.
It started to climb in January from 5,923.72 to the high of 6,090.39, and settled at 6,041.19 by the close of the month. In the process, it churned a monthly gain of 151.36 points or 2.57 percent.
In February, the market opened at 6,041.77, just about where it ended by the close of January. It, then, proceeded to hit the high of 6.424.99 and settled to close at the same high of 6,424.99. For the month, the market made a net gain of 388.80 points or 6.44 percent.
Notice that in these two months the market was on the rise on regular volume and value turnover. The climb was quick and fast. But as it traded higher, as it did in the last three weeks of this month, the market tended to retreat as if it was hitting resistance whenever it touched 6,500. As can be seen, the market was unable to go higher than 6,550.94 on March 7. It closed that day at 6,481.83.
The following week, it hit a high of 6,535.92 on March 11 but again closed lower that day at 6,529.58.
Since then, the market tried to climb higher but always met resistance as it approached 6,500, the market gave in to selling pressure last Friday and buckled down to 6,339.26.
Following the tenets of technical analysis, we needed additional confirmatory signs, even if by the looks of things the market could probably already be in the accumulation than distribution phase. As a matter of consolation, we might possibly encounter the added signs we need to see this week.
(The writer is a licensed stockbroker of Eagle Equities, Inc.. You may reach the Market Rider at marketrider@inquirer.com.ph , densomera@msn.com or at www.kapitaltek.com