Stocks move in three directions-up, down, and sideways. The sideways moves can be divided into three basic categories: trading in a range, congestion, and consolidation.

When we say a stock is „trading in a range,“ that means it is bouncing up and down between a low price area, or support, and a higher price area, or resistance. It is not trending. Another term for trading in a range is „bracketing.“

In „the old days,“ before explosive volatility infiltrated the market, particularly the Nasdaq, traders used to take great joy at finding a stock trading in a range. Some traders called them „rolling“ stocks. Playing these securities produced tidy profits, as traders bought the dips and sold the rallies.

These days, trading ranges tend toward the unpredictable, even in dignified listed stocks. Follow-through, meaning a smooth transition in a continuous move to the upside or downside, may be rudely interrupted by market or sector antics. I no longer recommend-in fact I warn against-playing stocks trading in a range. Gary Anderson, veteran market analyst and author of the weekly market advisory service, Equity Portfolio Manager says, „Congestion areas tend to be ‚hot-war zones,‘ where strong and weak hands engage in active battle. At bottoms, scared traders sell into the waiting hands of strong buyers. At tops, the reverse is true. Strong sellers offer shares in size to late-adopters of the bullish trend.“

The below figure depicts how a stock trades in a range.

When a stock trades in a range, buyers support it at the bottom of its price range. When it reaches the top area of its range, however, buyers refuse to pay higher prices, so it falls again. This is one of the most uniform examples of rotating supply and demand.

The following chart shows a stock trading in a range.

The second way a stock trades in a sideways price pattern is „congestion.“

Think back to the last time you had a cold or the flu. Remember how your nose was all „stuffed up,“ and you couldn't breathe? In the same way, a stock in a congestion pattern gets stuck moving laterally, in an erratic, disorganized fashion, with very little follow-through, as though it can't breathe. You'll see this many times in a stock experiencing a Stage Three.

Congestion patterns form resistance and support. If a stock falls under a ragged congestion pattern, that congestion will act as resistance. Why? Because all those who bought at the high price area are annoyed and are just waiting for the stock to bounce near enough to what they paid for it so they can dump it without too big a loss. That creates supply. Conversely, if the stock rises above the congestion area, the congestion forms support.

Please avoid holding stocks moving in a congestion pattern. Day traders may play them intra-day, but for our purposes of holding overnight, a congestion pattern usually produces losses. As I said in my previous book, „You don't kiss a . friend with a cold, and you don't trade a stock in a congestion pattern.“

Unlike the congestion pattern, the next sideways pattern will become our best friend. It's called a „consolidation“ pattern, and it presents profitable opportpnities when observed and played properly.

A stock in a consolidation pattern moves sideways in a very tight price range. You'll see this pattern most often in a basing pattern, or when a stock is in an uptrend and decides to go into a „resting“ mode.

Picture a pressure cooker-a big pot placed on a hot stovetop with its lid clamped on so it becomes airtight. The superheated steam in the pot cooks the food. Now, if you turn up the heat under the pot, the steam expands. If you open the vent in the lid, the steam escapes with a loud „whoosh.“ Were you to lift the lid with the heat still burning on high, the steam and food would erupt into the air.

Just so, a stock moving in a tight sideways consolidation pattern heats up in a pressure cooker.' Bulls lift, bears squash. Finally, at some point, the pressure cooker ‚builds up so much steam, it bursts open and the contents explode into the air! In other words, a jolt of rising volume-caused by good/bad news or market activity-explodes the stock price to the upside or downside. When you‘re playing a stock breaking out of a congestion pattern (assuming you're on „the right side“), you can profit mightily from the price explosion.

The below figure displays a typical „congestion pattern“. When a stock breaks above or below the congestion area (think „ledge“ or "shelf'), accompanied by high volume, it many times produces a buy or sell signal.

The longer a stock stays in a consolidation period, the more explosive the move to the upside, or downside, when it finally occurs. That's why you'll often read in IBD's „Investor's Comer“ that price breakouts from bases that last at least four to six weeks are optimum.

Remember, once a stock breaks down from a tight consolidation pattern, the consolidation forms major resistance- think „glass ceiling“-and the stock may struggle when it tries to rise above it.