Experienced market participants know that stocks spend most of their time in seemingly random ranges. It is only for a short time that they will actively trend up or break down. This is logical since companies will go about their business in a somewhat predictable and systematic way.
When something unusual or extraordinary happens, or is anticipated to happen, the boundaries of the range begin to get probed. Observing the longer term ranges of stocks will give good clues as to an imminent material change in a stock’s fortunes. There’s an old adage that “the longer the base, the bigger the move” and it bears observing when looking at range bound prices.
In a strong market, a stock will often transition from a strong move out of a base only to consolidate at a higher level in a new range. During this time, prices will ebb back and forth as profit takers and new buyers battle to set prices. These types of consolidations after a strong move can lead to a powerful move once the range has been broken. If moving averages are strongly supportive of a long trend, we expect that an upside breakout will follow. A recent dramatic example is SPOT, indicated in the chart below:
After an impressive run, the short consolidation of range bound trading broke out on the upside in dramatic fashion very quickly. There are numerous technical qualifiers and target parameters for such a move which I won’t detail here, but this is a pristine illustration of the objectives to look for on a stock which consolidates after a strong move. Yet, this condition is not rare. Range bound flags are among the most powerful chart patterns to look for.
Not every range bound pattern will be as pristine, but we can observe a few that are in development now which bear watching.
FTNT is software security company which is in the midst of consolidating after a strong run. We can observe the price range traced out after the upside breakout in early May. It’s difficult to know how long prices will stay trapped in this range, but probes to the upside should be assessed for a new breakout leg targeting 170.
Following are 2 other issues trading in ranges, albeit with somewhat different circumstances. One is gold related and the other is a bitcoin proxy. GLD has been in consolidation after a runup in the past few months and we anticipate a decisive move above the recent range top. Bitcoins have not been as strong but nevertheless have been rangebound for quite some time and the moving averages suggest that a new uptrend is emerging. Accordingly we anticipate a breakout if 12.75 is pierced on GBTC.