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chapter eleven
Consolidation FormationsAn army, which has pushed forward too rapidly, penetrated far into enemyterritory, suffered casualties, and outrun its supplies, must halt eventually,perhaps retreat a bit to a more easily defended position and dig in, bring upreplacements, and establish a strong base from which later to launch a newattack. In the military parlance with which we have all become more or lessfamiliar these past few years, that process is known as consolidating one’sgains. Although it will not do to overwork the analogy, there is much in theaction of the stock market which may be compared to a military campaign.When a stock pushes ahead (up or down) too fast, it reaches a point wherethe forces that produced its move are exhausted. Then it either reverses itstrend (in a Major or Intermediate sense), reacts to a good Support Level, orConsolidates its position, in some sort of “sideways” chart pattern composedof Minor Fluctuations, until it has caught up with itself, so to speak, and isready to go on again.We already have had occasion to refer to Consolidation Formations inour study of Symmetrical Triangles and Rectangles. We saw how those twochart formations might either reverse the previous trend or Consolidate itin preparation for its continuation. We noted that about three out of fourSymmetrical Triangles will turn out to be Consolidations rather than Reversals — and Rectangles in about the same proportion. Even a Flat-ToppedBroadening Pattern, constructed at the Top of an Intermediate Advance, may,despite its normally Bearish implications, be converted into a Consolidationor Continuation Formation if its Flat Top is decisively penetrated on theupside.A Dow Theory Line in the chart of one of the Averages may be either aConsolidation or Reversal Formation, and is rather more likely to be theformer than the latter. A Dow Line is, of course, a sort of loose Rectangle.The fact is that almost any sort of sideways price pattern, such as is oftentermed a “Congestion” or trading area, provided trading volume tends todiminish during its construction (and provided it does not show definitebroadening tendencies), usually functions as a Consolidation. But most areasof Trend Consolidation are fairly well defined, taking on a recognizablepattern.
189
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2422
1945
201918G
171615
MARTIN – PARRY
14
MRT
13
X D 150
1211Sales100’s125100755025
APRILMAYJUNEJULYAUGUST SEPTEMBER7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29
FIGURE 105. This is a typical and practically perfect Flag, constructed May 12 toJune 2, 1945, in Martin–Parry. Daily turnover diminished to a low rate as pricessettled down for exactly 3 weeks after their swift advance from 11 to 16½, but heldup away from the lower boundary line during the third week, and then burst outtopside with high volume in another straight-line push from 15 to 21. Study thischart again when you come to the Flag-measuring formula on page 192. The dashesat 12 indicate the upper range of an old Resistance Level (Chapter 13).
Flags and PennantsWe do not need to spend more time here on the Triangles and Rectangles;they have been examined in both their Reversal and Consolidation manifestations in previous chapters. Our first two formations, which are characteristic of Consolidation only, are the Flags and Pennants, and they are curiouslyrelated in certain aspects, as we shall see, to Triangles, Rectangles, andWedges.A Flag looks like a flag on the chart. That is, it does if it appears in anuptrend; the picture is naturally turned upside down in a downtrend. It
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24NATIONAL GYPSUM
NG
22201918171619451514Sales100’s125100755025JUNEJULYAUGUST16 23 30 7 14 21 28 4 11 18 25 1
SEPTEMBER OCTOBER NOVEMBER8 15 22 29 6 13 20 27 3 10 17 24 1 8
FIGURE 106. Another typical Flag of 3 weeks’ duration, August 30 to September 18.This National Gypsum chart overlaps that in Figure 49, showing the false move atthe apex of the May–June Symmetrical Triangle. A buy signal was given when pricespushed up through the old apex level on August 23 with increased volume. Mostinteresting is the second Symmetrical Triangle which formed in October–November,an almost exact replica of the first, but with a downside false move at its apex. Thesharp increase in volume on November 27 left no doubt as to its being a Consolidationrather than Reversal Pattern. “NG” went on up to 33.
might be described as a small, compact parallelogram of price fluctuations,or a tilted Rectangle which slopes back moderately against the prevailingtrend. Let us consider the Uptrend Flag first. It usually forms after a rapidand fairly extensive advance which produces a nearly vertical, or at leastquite steep price track on the charts. On such moves, volume normally showsa progressive increase until it reaches a high rate. This volume (since everytransaction signifies a sale, as well as a purchase) is a warning, of course,that many holders of the stock are taking profits. Eventually the pressure ofprofit-taking halts the markup. Prices “churn” without further gain and thenreact two or three points on reduced turnover. A new rally occurs, but failsto equal the previous high or attain the previous top volume. Another reaction carries quotations slightly below the preceding Bottom with furtherdiminution of activity. Then follows a series of similar Minor Fluctuations,each of whose Tops and Bottoms are successively a trifle lower than itspredecessor, and with volume shrinking markedly and constantly as the
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2422201918
NASH – KELVINATOR NK
1937
171615
Sales100’s
25020015010050JANUARYFEBRUARYMARCHAPRILMAYJUNE2 9 16 23 30 6 13 20 27 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26
FIGURE 107. Flags of the “Half-Mast” type appear most often in the later and mostactive stages of a Primary Advance. The above example (January) was the lastConsolidation Formation before “NK’s” 1937 Bull Market Top. Note the RectangleReversal Pattern in March and series of step-down patterns that followed.
pattern develops. On the chart, the initial, steep up-move followed by thecompact, sideways, and slightly down-sloping price Congestion Area, whichcan be roughly bounded, top and bottom, by parallel lines, takes on theappearance of a mast (or halyard) with a flag flying from its peak. Hence,of course, the name of the formation.Sometimes each rally and setback within the Flag takes 3 or 4 days,rarely more. In other cases, prices will skip back and forth between the upperand lower Flag boundaries in a single day or two, in which event the patternon the chart consists of an almost solid block of price range lines. The widerthe pattern (from top to bottom) the longer time, naturally, it should takefor each swing within it to be completed. This process of Minor Fluctuationsmay continue for only 5 days to a week if the Flag is narrow, or go on foras much as 3 weeks. Daily turnover by that time usually will have shrunkto a relatively low ebb. Then suddenly, prices will erupt with a new burstof activity from the end of the Flag and push straight up again in anotheradvance that practically duplicates the original “mast” atop which the Flagwas constructed.We have spoken of the Flag pattern as being moderately down-slanting,but the very short and “solid” ones will frequently develop horizontally andlook like small squares. (On rare occasions a pattern of the Flag type in anuptrend will even slope up a trifle.)
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44
403836
VANADIUM CORP.
VA
34323028262422201918
1936–1937
1716Sales100’s
125100755025OCTOBERNOVEMBER DECEMBERJANUARYFEBRUARY MARCH3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 6 13 20 27 6 13 20 27
FIGURE 108. Sometimes a stock will make a long series of small ConsolidationPatterns in its uptrend, one following right on the heels of another as successivegroups of traders buy in while others take their profits on previous purchases. Inthis sequence of step-ups in Vanadium, the Flag Pattern formed in January 1937 rana few days over, but the volume breakout of February 4 left no doubt that the trendwas still up. A final Top was made at 39½ in March. Note strong buy signal givenon December 14. Refer to this record again in connection with Support and Resistancestudies in Chapter 13.
Flags form on steep down moves in much the same manner and withprecisely the same implications as they do in uptrends. Down Flags, ofcourse, tend to slope up; i.e., they simply invert the picture presented by an
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6819366460565248BRIGGS
BG
4440Sales100’s25020015010050JANUARYFEBRUARYMARCHAPRILMAYJUNE4 11 18 25 1 8 15 22 29 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27
FIGURE 109. A Bull Flag in February and a Bear Flag in April 1936, in Briggs. TheTop between was a Symmetrical Triangle. April 30 was a Reversal Day. Prices recovered to 64½ in November 1936, making there a long-term Major Double Top withthis March high. The Support–Resistance Zone at 51–53, indicated by dashed line,was still effective in 1946! (See Chapter 13.)
up Flag. Trading volume diminishes during their formation and increasesagain as prices break down away from them.
The Pennant — A Pointed FlagThe only important difference between a Pennant and a Flag is that the formeris bounded by converging boundary lines rather than parallel. The normalPennant, in other words, is a small, compact, sloping Triangle. It slants downwhen it appears in an uptrend, and up in a downtrend. It forms, as a rule,after a rapid advance (or decline), and trading volume shrinks notably during its construction. In fact, activity tends to diminish even more rapidly ina Pennant than in a Flag (which we naturally would expect on account ofthe progressively shorter fluctuations which compose it), and may dropalmost to nothing before the Pennant is completed and prices break awayfrom it in a new and rapid move.The Pennant might also be described as a short, compact Wedge, characterized by marked diminution of activity. When, as is usual, it slants backagainst the preceding trend, its forecasting implications are similar to those
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726864
ANACONDA COPPER
A
60
G
5652G
G
481936–193744403836Sales100’s500400300200100JANUARYFEBRUARY MARCHOCTOBER NOVEMBER DECEMBER3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 6 13 20 27 6 13 20 27
FIGURE 110. The down-sloping, Converging Price Formation of November 4through December 9 might be called either a short Wedge or a Pennant. Note smallFlag in October; also Runaway Gaps November 4 and February 19, and BreakoutGap December 10.
of the Wedge, in that prices break out of it in a direction opposite to its slant.But there are rarer Minor variations of the Pennant, comparable with thosesometimes found in the Flag, in which the price area is very short and “solid”and practically horizontal (like a Symmetrical Triangle), or in which the slopeis actually slightly in the same direction as the preceding trend instead ofagainst it. When prices move out of the last named type, they ordinarily doso not in a sudden straight-line breakaway but rather in an accelerating curvewith volume increasing gradually instead of abruptly at the break. The wholepattern then resembles a curved horn which runs to a long, slender point.Don’t let these variations worry you; there is nothing deceptive about theirappearance; their kinship to the more common, normal form is quite apparent.
The Measuring FormulaThe same approximate measuring formula applies to the Pennant as to theFlag. They are both “Half-Mast” Patterns which ordinarily form after a fairly
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1944
6PACIFIC TIN
PTC
54 12Sales100’s125100755025APRILMAYJUNE8 15 22 29 6 13 20 27 3 10 17 24 1
JULYAUGUSTSEPTEMBER8 15 22 29 5 12 19 26 2 9 16 23 30
FIGURE 111. An example (in June 1944) of the very brief and compact type of price“Congestion” which can be classed as a Flag. The advance here started at 5 from a13-month Symmetrical Triangle of which only the last 2 months appear above. Themeasuring implication (see below) of this tiny Flag was not fulfilled until after priceshad undergone a sort of Triangular Consolidation in July.
steady and rapid (steep) price movement. In applying the measuring rule,go back to the beginning of that immediately preceding move, to the pointwhere it broke away from a previous Consolidation of Reversal Formation(or through a significant trendline or Resistance Level, with which laterchapters are concerned), a point recognizable as a rule by a quick spurt inactivity, and measure from there to the Minor Reversal level at which theFlag or Pennant started to form. Then measure the same distance from thepoint where prices break out of the Flag or Pennant, and in the same direction. The level thus arrived at is the minimum expectation of this type ofConsolidation Pattern. As a matter of fact, advances from Flags or Pennantsin an uptrend generally go farther (in terms of points or dollars) than thepreceding move, while declines may not carry quite so far. Hence, the formula is best applied on a semilogarithmic chart by measuring actual chartdistance rather than by counting points. You can check this by referring tothe examples illustrating this study.
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2826MULLINS MANUFACTURING B MNS
1936
24222019181716G
15141312Sales100’s5040302010APRIL4 11 18 25 2
MAYJUNEJULYAUGUSTSEPTEMBER9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 5 12 19 26
FIGURE 112. Another example of the series of Flag-type Consolidations that mayform in a rapid, third-phase Bull Market Advance. Mullins went from 15 to above39 in 6 months in 1936, dropped back to 31, and then rose again in March l, 1937, toits previous high, making a Major Double Top. (“MNS” was split 2-for-1 in 1937.)The July–August Flag ran for 5 weeks — too long to be trusted without additionaltechnical evidence (see point 3 on page 194). The danger in such prolonged formations is either that the breakout, when it finally appears, will fail to follow through,or that prices will keep right on drifting down. For the moment — on August 25 —it looked as though this Flag had “gone stale,” but when prices rose above theprevious high on August 27, with a smart pickup in volume, purchases were obviously safe.
Reliability of Flags and PennantsThese pretty little patterns of Consolidation are justly regarded as among themost dependable of chart formations, both as to directional and measuring
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indications. They do fail occasionally, but almost never without giving warning before the pattern itself is completed. All that is necessary to guardagainst such failures is to strictly apply the tests as to authenticity of patternwhich we already have incorporated in their description. These are1. The Consolidation (Flag or Pennant) should occur after a “straightline” move.2. Activity should diminish appreciably and constantly during the pattern’s construction, and continue to decline until prices break awayfrom it.3. Prices should break away (in the expected direction) in not more than4 weeks. A pattern of this type which extends beyond 3 weeks shouldbe watched with suspicion.The matter of practical trading on these particular formations will betaken up in the second section of this book, devoted to tactics. But our secondtest deserves some further comment here. If a pattern begins to develop onthe chart which, so far as the price picture alone is concerned, qualifies as aFlag or Pennant, but during which trading volume remains high or obviouslyirregular instead of diminishing, the outcome is more apt to be a quickreaction against, rather than continuation of, the previous trend. In otherwords, such high or irregular activity formations are characteristically MinorReversal Areas rather than true Consolidations. Watch the volume half ofyour chart at all times.
Where They May Be ExpectedFlag and Pennant Consolidations are characteristic of fast moves. Therefore,they show up most frequently in the later, dynamic phase of Bull Markets,after the first accumulation and the more orderly early markup stages havepassed. Hence, the appearance of these patterns may be taken as a warningthat an advance is approaching its final weeks. The rapid phase of a MajorBear Trend, on the other hand, is its second stage, often characterized byalmost “vertical” Panic Declines. The Flags and Pennants which developtherein are usually short — completed in a matter of 3 or 4 days rather thanweeks. In the late months of a Bear Market, formations that evolve on thecharts in the Flag or Pennant similitude often will run too long (4 weeks ormore), begin to show an increase in volume on the rallies, and be succeededby only dull and limited reactions.In general, it may be said that these particular chart patterns are mostcommon (and most dependable) in uptrends. The appearance, after a MajorDecline, of price pictures which, at the start, assume the downtrend Flag orPennant form must be regarded with caution. Unless such developmentshold strictly to the limitations we have stated above under the heading of“reliability,” do not trade on them.
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4844
1945–1946
403836M
343230
26
M
28
WYANDOTTE WORSTED24
WYO
G
22Sales100’s125100755025JANUARY FEBRUARYMARCHAPRILMAYJUNE22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15
FIGURE 113. The vertical lines marked “M” show how the measuring formula isapplied to a Flag Pattern. Note that the first measurement is taken from the levelwhere the mast leaves the previous “Congestion” up to the peak of the Flag. Thissame distance is then measured up from the Flag breakout. In “WYO,” the formulaworked out exactly. Trading commitments should normally have been cashed inabove 36 on this move. They might then have been reinstated when it becameapparent by April 2 that a Rounding Bottom was completed (note volume) for a newadvance.
Flag Pictures on Weekly and Monthly ChartsOne of our requisites for a dependable Flag (or Pennant) was that it shouldnot take more than 4 weeks to complete its pattern and break out in a newmove. It stands to reason, therefore, that a true Flag cannot show up at allon a monthly chart and barely appears on a weekly chart. You will find priceareas on long-range charts, patterns which have taken 8 or 10 weeks to asmany months, and sometimes a year or two, in their construction, whichassume the shape of a Flag, but do not expect them to function as Flags.
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686460565248G
44
AMERICAN WOOLEN
WY
40381946
3634
G
3230Sales100’s125100755025JANUARY FEBRUARYMARCHAPRILMAYJUNE5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
FIGURE 114. A 1946 chart that delighted technicians. Contains a perfect “HalfMast” Pattern in January, with measuring gaps (G, G) above and below it; a downsideFlag in early February (check measurement); a fine Ascending Triangle at the bottomof this reaction, with a Throwback in April, giving an ideal “buy spot.”
Examined in detail on a daily chart, these same long areas almost alwayswill be found to contain price formations having entirely different significance. Frequently, what is really a Major Reversal Area following a long, rapidadvance will look something like a Flag when it is condensed on a monthlychart. So, do not trust such pictures on long-range charts; do not take it forgranted that they represent Consolidation for a new rise; find out what thedetailed daily plotting for the same period says.
Rectangular Consolidations: An Early Phase PhenomenonIn contrast with Flags and Pennants, which are typically last stage BullMarket Concomitants, Consolidations of the Rectangle class are found moreoften in the earlier phases of Bull Trend evolution. In Major Bear Moves,Rectangles may develop in the first stage just before a Panic Decline, or in
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MO(D) - Daily NYSE L = 65.41 +0.42 +0.65% B = 0.00 A = 0.00 O = 65.65 Hi = 65.65 Lo = 65.05 C = 65.41 V = 4968500
69.0065 .4166.00
60.00
56.00
52 .5152.00
48.00
45.00
42.00
S
O
N
D
04
F
M
A
M
J
J
A
S
O
N
D
05
39.00FM AMCreated with TradeStation
FIGURE 114.1. MO. Talk about your technician’s delights. Altria Group throws offsome pretty good delights here. A breakaway gap and run days to the downside. Adown flagpole with flag. Pattern gaps. But good pattern gaps, really interesting. Thena triangle complete with a breakaway and an up flagpole with flag. Of course thenontechnician probably is suffering from nausea at this point. It’s an ill roller coasterwhich bodes ill for everyone. And note well, a completely tradable situation for thealert short-term technician.
the last stage preceding a strictly limited final sell-off. The latter manifestation presumably betokens premature accumulation by interests who feel thatprices have already gone low enough to suit their purposes. (They come outall right, of course, if they are able to hold on through the remainder of theBear Swing and long enough for the next Bull Market to put prices back upagain to profitable levels.)
Head-and-Shoulders ConsolidationsAll our references to the Head-and-Shoulders Formations up to this point(see Chapters 6 and 7) have considered that pattern as typifying a Reversalof Trend, and, in its normal and common manifestation, that is most definitely the Head-and-Shoulders function. But, occasionally, prices will gothrough a series of fluctuations which construct a sort of inverted Head-andShoulders picture, which in turn leads to continuation of the previous trend.There is no danger of confusing such Continuation or ConsolidationFormations with regular Head-and-Shoulders Reversals because, as we havesaid, they are inverted or abnormal with respect to the direction of the price
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2826AMERICAN LOCOMOTIVE
LA
2422201918171615193514Sales100’s5040302010JULYAUGUSTSEPTEMBER OCTOBERNOVEMBER DECEMBER6 13 2 27 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28
FIGURE 115. A Flag (end of November) which seemed for several weeks to havefailed completely. However, prices rose quickly to 36¼ from their December 23 low,thus finally carrying through according to formula. Note Flat-Topped BroadeningFormation which started the move.
trend prior to their appearance. In other words, one of these patterns thatdevelops in a rising market will take the form of a Head-and-ShouldersBottom. Those that appear in decline assume the appearance of a Head-andShoulders Top. By the time these price formations are completed (left shoulder, head and right shoulder evident), there is no question as to their implications. But at the head stage, before the right shoulder is constructed, theremay be — usually is — considerable doubt as to what is really going on.The volume pattern in Consolidations of this type does not follow therule for Reversal Head-and-Shoulders. In a downtrend, for example, theConsolidation Formation resembled in its price contour a Head-and-Shoulders Top, but the attendant volume will diminish instead of increase on theleft shoulder and head, as well as on the right shoulder. The same holds truefor the “Bottom” Patterns that develop as Consolidation in an advance
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52ANACONDA COPPER
A
4844
40383634
S
SH
1936
32Sales100’s500400300200100JULYAUGUSTSEPTEMBER OCTOBER NOVEMBER DECEMBER4 11 18 25 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26
FIGURE 116. Typical of the form that Head-and-Shoulders Consolidation Patternsmay take, both as to price pattern and volume, was this development in Anaconda.Measuring formula for the small Flag in October should be applied from the pointof breakout through the Head-and-Shoulders neckline.
market. Breakouts, however, resemble in all respects those arising fromReversal Formations.Head-and-Shoulders Consolidations of the Complex or Multiple-typevery seldom appear on the charts. Theoretically, they might, of course, andshould be as easy for the chart technician to handle as the simple forms.The formula for determining the probable minimum price move (beyondthe neckline) from a Head-and-Shoulders Reversal Formation was discussedin Chapter 6. To anyone familiar with the verities of stock market trends andthe endless variety of pictures that the charts can present, it is amazing howaccurately that formula works out, how