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Stocks don’t just go up and down…they also go sideways.

And while many traders scroll right past a sideways chart, I pay attention.

When we expend energy, we need rest before getting at it again. Well, it’s no different for stocks.

And this “resting phase” is a factor in what happens next.

The more rest, the more energy that can build up…

This is why the consolidation breakout is one of my “bread and butter” chart patterns.

And I’m going to walk you through the details now.

What is a Consolidation?

Consolidation happens when a stock needs a breather.

This is a resting phase where the stock can be seen trading in a range…often a tight range.

It’s both easy to spot and understand.

Just think about a simmering pot of water on the stove.

It’s quietly building up heat…

And once it does, the water will boil over.

Turn the knob down and the simmer stops, turn it up and it starts to boil over…

A consolidation is kind of like that.

The stock is taking a break while it builds up energy for the next move.

I am trying to grab this as it starts to boil… which is the break above the consolidation range.

Keep in mind that the next move can be in any direction. This is why I prefer to buy after it breaks out of the range on higher volume.

Importance of Volume

As with any setup, I’m also watching trading volume. I want to see light volume during the consolidation. This is the “resting phase” when the many players are making decisions and building positions.

And then I look for increased volume when the stock breaks out of the consolidation.

This shows me there is real demand behind the move and likely will have enough momentum for a decent target move.

And with the pressure build-up in the range, if the stock does break this level, it can lead to a significant change in supply and demand dynamics, with the top of the consolidation range often becoming a support level for a new move up.

Therefore I am using this level to plan my trade around.

The Consolidation Period

Take a look at ZOM for an example:

You see how the stock is in a downtrend and then levels out into a narrow trading range for weeks (marked by blue lines)?

This is the consolidation period/ resting phase… or “simmer time.”

How do I play this period?

I don’t… I simply wait.

Just because a stock is consolidating doesn’t mean it will break out, or do it any time soon.

Not to mention it could end up breaking out in the opposite direction.

This is a time that I like to practice patience.

I don’t even have to waste my time looking at it…yet. Although, I do like to pay attention to be prepared for a potential breakout.

The Breakout

This is one of my “bread and butter” trading patterns…(along with the Stair Step).

Take the concept of a consolidation or resting phase…and then add in a breakout. Now I’m on high alert.

Let’s go to the daily chart below…

ZOM broke above the consolidation range… and volume was spiking up at the same time.

As mentioned above…

Volume is key in breakouts because it proves trader conviction in the move and helps push the momentum forward.

It also creates the liquidity I need to get in and out of the stock while it makes its move.

As you may know, I like to target the next resistance level on the chart. And in this case it was the 50 day MA line on the daily chart at 1.03 (red line in chart above).

While ZOM broke out making a move right up to the 50 MA, not every trade works out like this…so it’s important to really pay attention to what you are seeing.

Things to keep in mind are the strength of moving out of the consolidation, volume levels, and power of the movement into the close…

Hopefully, this helped you see the simplicity of a consolidation breakout…

For that reason it’s one of my “bread and butter patterns” that I use quite often (see also my Stair Step Pattern here).

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

We’ve all sat and watched a stock just rolling up like it has no cares in the world.

Each time it pulls back, it stays above the previous low.

Then it moves back up to break above the previous high, creating another swing higher.

This is what I like to call a stair step pattern.

And it’s one of my favorite patterns to trade.

This is a pattern formed by a strong stock… and there are actually a number of ways to trade it.

Such as playing the pullback at support or buying on the next break of a high.

But don’t worry, I’m not leaving you with just that…

Today I’m going to walk you through some charts to show you what it looks like.

 

Basic Stair Step Pattern in Advaxis, Inc. (ADXS)

I put a clear visual of this pattern in the chart below so you can really get to know it.

Basically this is a pattern of higher highs and higher lows… the stock is “stepping” up.

With a stair step trade, it’s key that the pattern exists first. Seems simple enough, but look at the chart below…

There’s a leg up, then a leg down… at that point we don’t have a stair step pattern yet. We need a second leg up to complete the pattern.

Two key points here: There must be a higher low on the step down, and the pattern isn’t complete until it breaks above the high of the previous step up.

If you were looking at the chart below, what would you do with it?

I hope nothing… There is no pattern here. The stock moved up and then moved down, that’s it.

To complete the formation, we need to get a move back up above that black line (previous high).

At that point the stock has formed a stair step pattern (as seen in the first chart above).

So how do we trade the chart below?

We simply wait… (until it breaks the previous high/ black line, it’s still in a downtrend).

In the next chart, you can see when ADXS broke above the black line (previous high), it was now making a step higher.

A potential trade here is to buy the break of the previous high…

Another key to the stair step: Increased volume on the breakout.

Notice the spike in volume on the break above the previous high in the chart below.

This is key. An increase in volume gives me confidence in the move.

This also provides liquidity to get in and out on the potential move up.

Now you probably want to know how to find a target.

When it comes to penny stocks… I don’t want to hold them too long.

After all it’s just a penny stock, not an investment.

So what I like to do is look for the next levels of resistance to find good target ranges.

In the case of ADXS, you will notice the 200 day MA is sitting at 1.15, just above the breakout.

That makes for a good short term target as I would expect the stock to hit some resistance in that area.

As with anything, the more things that line up the better.

When looking at the pullback, the stock also bounced off the 50 day SMA.

Holding support at a major moving average on the higher low just gives me one more show of strength to add to my analysis.

I love this pattern.

In fact, I am searching for stocks that are making higher highs and higher lows every day.

Here’s a chart of a recent watchlist pick…

Hertz was stepping up for over a month. There are multiple opportunities in this one chart alone.

All from understanding how strong trending stocks move with higher highs and higher lows.

Well there you have it, one of my favorite chart patterns… The Stair Step Up.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

It’s all about the meme stocks lately.

Gamestop (GME) being the one that really opened eyes to what was a new phenomenon in the stock market…small account retail traders banding together to push back against the big hedge funds.

And since then, it hasn’t slowed down one bit with AMC rocketing to over $70 at the beginning of the month and CLOV spike to nearly $30 a few days ago, among many other names talked about in the Reddit community.

But something that is often forgotten…

None of this would likely be happening without the rise of zero commission trading accounts.

A big part of those trades taking off is people being able buy and sell small numbers of shares quickly without any upfront cost, allowing big groups of small account retail traders to band together and push these stocks to new heights.

On the surface, no commissions sounds great. But there’s actually quite a bit of controversy surrounding it all.

So the question still exists….Is it good or bad?

 

Payment For Order Flow

 

This is the system Robinhood used to revolutionize trading for the small investor.

Unheard of up until then, Robinhood came out with commission free trades.

At first it seemed like there was no way they would be able to stick around without charging commissions.

After all, where would their profits come from?

Enter payment for order flow.

What’s that?

Basically… a brokerage firm, instead of sending orders through the exchanges, directs orders to a particular market maker for trade execution…and receives compensation for doing so.

The system helps brokers make enough money on the back-end so they can more easily charge zero commissions for trades.

This is how Robinhood gained popularity with retail investors and changed the industry along the way.

As other brokers have followed suit, being charged commissions is now a thing of the past for most regular retail brokerage accounts.

It all seems simple enough…brokerages get paid by the market makers and traders get zero commissions.

Win, Win right?

Well not so fast…

 

The Controversy

 

In a recent analysis… Hitesh Mittal, the founder of BestEx Research, found that the top five market makers seem to get 24.5% price improvement for retail investors’ trades, compared to the National Best Bid and Offer (NBBO) prices on exchanges.

Which seems great for everyone… but Mittal also found that those trades would get even better prices if the retail trades were all done through exchanges.

Mittal’s analysis in The Good, The Bad & The Ugly of Payment for Order Flow shows that overall spreads on trades could drop by 25% if all trades were moved to exchanges.

So Robinhood and other brokers argue that they are offering price improvement with payment or order flow.

The problem is that they are comparing executions to the NBBO on the exchanges and don’t take into account what spreads would be if all trades were sent to the exchanges.

Another question is oversight, what if the broker selects a wholesaler because it pays more rather than because it executes trades at the best price for the retail customer?

If you remember the trouble Robinhood got into just a while back…the SEC found that they had been cutting deals with market makers that were bad for their customers… (They have since changed their practices to fix the issues).

What’s Next?

 

Just this week…Gary Gensler, chair of the SEC, said that they will be reviewing payment for order flow and there could be amendments to the current market structure rules.

The way things are now, brokers would be at a competitive disadvantage if they stopped using it.

And this is why the SEC is looking into it… it’s a regulatory issue.

They won’t be the first to question it however… Market regulators in the U.K., Australia, and Canada have all stepped in and banned payment for order flow.

And this brings us full circle to the meme stock phenomenon.

Without the payment for order flow structure, it’s unlikely that brokers could sustain a zero commission model.

And if commissions came back, that could affect the volume in meme stock trades as those trades partly rely on the ability to buy and sell small numbers of shares quickly without any upfront cost.

I don’t know what the SEC will end up doing, but it’s something to keep an eye on as it could affect the zero commission model.

It’s worth noting that the payment for order flow structure has been around for a long time and it’s been investigated in the past…yet always allowed to continue for a number of reasons.

It would also be hard to stop the movement of a zero commission trading industry. Retail traders wouldn’t be happy at all…so speculating here, but most likely the SEC will just look to add more structure and oversight, or more open reporting from the parties involved.

We’ll see…

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.