Consolidation and Distribution: Sideways Trading Ranges

Trading ranges can exist at both the top and the bottom of trends. A trading range that occurs after a downtrend is called a consolidation (or Low Base), as the range is generally narrow and tends to grow narrower over time. The way this range is identified is by measuring the highs and lows within it.

If the lows ascend, or the highest low increases, that will indicate the range is likely to break to the upside. Even if the range has equal highs but ascending lows, the ascending lows suggest that the range may break out to the upside.

However, the key differentiating factor is that the range gets narrower through time. Typically, the range starts narrow and consolidates further. Often, the consolidation forms immediately after a downtrend, which is characterized by lower highs and lower lows.

On the other hand, the wide-range, volatile distribution pattern features large, whippy movements from high to low. This pattern typically occurs immediately after an uptrend. The wide-range distribution also makes shallow new highs, but then immediately gives up the gains after reaching those highs.

Another important point to note is the presence of gaps. The wide range distribution will often have many gaps, usually gap downs. This suggests that institutions responsible for the gaps are selling off during post-market or pre-market sessions after a new high has been established.