Stocks & Markets move in Trend! For a layman who does not know anything about the stocks & market movements, this statement is a surprise. Generally, it is believed that the movement is erratic & irrational. One of the basic concepts used in the analysis of stocks & markets - consolidation, clearly indicates that there is a systematic & trending movement of stocks in the markets.

Consolidation is a phase during which stocks or markets move in narrow range with shrinking volumes (number of stocks bought & sold). These two characteristics are the basic traits of consolidation. During consolidation, the activity level drops so dramatically that everything looks gloomy. Neither buyers nor sellers are aggressive or enthusiastic about the stocks or market in general. This is the time when stocks change hands from weaker to stronger or from stronger to weaker. The way hands are changed depends on whether it is Accumulation or Distribution.

Accumulation

A type of consolidation in which, at the lower levels, stocks change hands from the weaker to the stronger. The smart market participants start buying stocks sold by the frustrated weak hands. The process continues till public notices the occurrence of accumulation. With public entry, prices gradually start picking-up till the euphoria reaches the climax resulting in excess demand. Stocks or markets reach the peak & that is the impact of accumulation. Technicians are always on the watch out for accumulation as the perfect entry point for stocks & markets. In Fig.1 accumulation can be seen at the bottom of the chart with public participation & excess as the sequential phases.

Distribution

A type of consolidation in which, at the higher levels, stocks change hands from the stronger to the weaker hands. The smart market participants start selling the stocks to the weak hands. The process continues till public notices the occurrence of distribution. With public entry, prices gradually start declining till the panic takes over, resulting in excess supply. Stocks or markets reach the trough & that is the impact of distribution. Technicians are always on the watch out for distribution as the perfect exit point from the stocks & markets. In Fig.1 distribution can be seen at the top of the chart with public participation & panic as the sequential phases.

Fig. 2 describes accumulation & distribution in more details. At the top of the chart, distribution is seen as a trading range between the resistance & support levels. Volume shrinks during this period, which can be seen at the bottom of the chart. After the breakout from the support level, downtrend begins. Bearish trend continues till the accumulation starts at the bottom between the new resistance & support levels. Volume again contracts during this period. Breakout of the resistance level finally results in the beginning of a bullish trend.