Pinch Me

I look at hundreds of charts a week scouring the markets for investments that are in the later stages of consolidation. I put them in different folders depending upon how quickly I feel they may be ready to buy. I hate to sound like a broken record but there is nothing more important to understand about perfecting your entries than the concept of consolidation. Markets only do two things they either 1) trend or 2) consolidate. Finding an investment that has been in a strong trend up but is in a period of consolidation is an investors dream.  Don’t get me wrong, even if you get the perfect setup there is no guarantee its breakout will be higher so you still need patience and some sort of trigger or confirmation before you buy. The chart of Arbor Realty, ABR, below is a great example. I had this in my “actionable” folder as a potential “buy” candidate.  As you can see price was in a nice uptrend until June of last year when it peaked and then began its current consolidation. What is interesting is to see during this time is how price moved very symmetrically as it formed two left shoulders, a head and two right shoulders of an inverse head and shoulders pattern before it actually broke out.  Notice during the entire consolidation period, the stock could not sustain a price close above that red horizontal resistance (at ~$7.04) for more than one day.  Each of the 4 times it tried to move higher, it failed until the most recent push.  That tells you how important that price level was. But the more times you bump up against a resistance the higher probability you will break through. And break through it did.

One other key concept you can learn from this post is you’ll notice the blue circle I annotated on the chart just prior to the end of last year. At that point in time we got a signal the upward trend will likely be resuming soon and provided an early entry signal for the more aggressive investors. The signal ws the fact that all 3 moving averages (red, blue and green lines) were pinched together, all 3 were pointing up and bullishly aligned (the faster is on top of the intermediate which is on top of the slower).  A pinching of bullishly aligned and upwardly pointing moving averages can provide a high probability early entry point for investments in consolidation.  Keep this in your investor toolbox and see how it has the ability to enhance returns.