Every stock and trading instrument goes through the 4 parts of trend. The first and longest part is the CONSOLIDATION. This basically means the 5/15- period moving averages are going sideways, flat. This is also the period where traders get chopped the most trying to get in early on a breakout or breakdown. Consolidations have the lightest volume so trying to trade those usually just end the trader up with wiggles and lots of little stops.

From that consolidation, eventually, the stock will break. Let’s assume a stock breaks out. The BREAKOUT forms a channel widening which is the second part of trend, as the stock moves higher on volume, the 5-period moving average will start to rise with it and eventually the 15-period moving average will start rising too. The 5-period moving average always outpaces the 15-period thereby creating the channel widening effect.

As the stock makes new highs, it will wiggle back to the 5- period moving average and continue to bounce, until it hits a PEAK/ EXHAUSTION level which is the third part of trend. On the exhaustion, the channel tightening forms taking the stock back to the 5 period moving average. If that 5- period moving average breaks, then an immediate move to the 15-period moving average completes the channel tightening.

From here, we setup MAKE OR BREAK which is the last part of trend as explained earlier, or back to consolidation as the 5/15-period moving averages go flat line again. If I had to place percentages on the four parts of trend, I would say that over 60 percent of the time, the stock will be in part 1 which is consolidation. Unfortunately, this is also where traders tend to overtrade and get chopped around in.


(Excerpts from Interview With Jea Yu)