Consolidation

Consolidation is a period during which a security's price trades within a relatively tight, sideways range — between defined support and resistance levels — after a significant directional move, as the market pauses to digest the prior trend before determining its next direction. Consolidation phases can resolve in two ways: a breakout in the direction of the prior trend (continuation) or a reversal in the opposite direction. The longer and tighter the consolidation, the more significant the eventual breakout tends to be, as energy builds with compressed price action. Consolidation is where most of the classic chart patterns form — flags, pennants, rectangles, and triangles are all forms of consolidation. Identifying consolidation correctly allows traders to prepare for the next move rather than chasing price after the breakout.