I was asked this week whether there is a way to project how far a trend will travel or how long a consolidation phase will last. Quite often the two are related. But in this blog, I will focus on setting price projections after a market has broken free from a congestion phase.
The most common consolidation patterns take the shape of flags (rectangle) and pennants (triangle) in charts. Just before sharp vertical moves, markets frequently have a series of sessions with below average day ranges and decreasing volume. Furthermore, during these low volume periods there tends to be plenty of price overlap and small candlestick bodies.
One method I use to project how far a trend is likely to extend is to count the number of days the market has been developing a flag or pennant. In the example below DIA (Dow Jones industrial ETF) spent 5 days developing a flag- shaped pattern. When the breakout begins, I refer to the 5-day average true range (ATR), because that is how many days the consolidation phase lasted. Next, take that ATR, which is 15 in this case, and measure the distance from the midpoint of the pattern. In this case the breakout was toward higher levels and the midpoint was 245. The sum of the 5d ATR and the midpoint equates to 260, which is the upside target.
This is just one method projecting price goals and should be helpful when setting strikes.
Senior Technical Analyst
Market Taker Mentoring, Inc.