1. Price Consolidation Patterns
Stock selections should be limited to stocks being in a confirmed uptrend and displaying evidence of being supported by instituational buying. To increase our probability to capture a stock which is supported by insitutions, we are looking for momentary pauses within the context of a confirmed uptrend which we call price consolidation patterns. Consolidation patterns are periods of digestion during which the previous upwards movement is met with temporary profit taking. Stocks under accumulation will rest and consolidate before the uptrend continues.
2. Volatility and Volume Contraction
Look for volatility contraction accompanied by volume contraction. In the best price consolidation pattern, volatility will contract from left to right. If a stock is under accumulation, a price consolidation represents a period when strong insitutional investors ultimately absorb smaller, weak traders. Once eliminated, the lack of supply allows the stock to move higher because only a small additional demand is needed to overwhelm the small remaining supply. The tight volatility contraction periods should be accompanied by a significant decrease in trading volume which provides further confirmation that supply has stopped coming to market.
3. The Perfect Buy Point
The perfect buy point represents the completion of the stocks price consolidation pattern as well as the volatility- and contraction period. As the stock price crosses the perfect buy point, it is the right time to open a trade. You should try to buy as close to the perfect buy point as possible and not chase the stock price more than 2-3% above the perfect buy point. In many cases, the price breakout through the perfect buy point is accompanioned by a siginficant increase in volume.