Consolidation is generally a contraction in volatility over time, especially recently. While there are a few scenarios where a stock might have high volatility recently but low over time (such as a stock falling to support in a longer term consolidation pattern), and a few scenarios where a stock is broadening and breaking out of a broadening pattern, there's going to be plenty of trades as long as I know the volatility on multiple time frames.
There are a limited amount of data points to determine how volatile a stock is, but with help of formulas, you can create new metrics.
Here are some relevant data metrics that have something to do with volatility or can be converted into information relevant to volatility:
1)Monthly Volatility
2)Weekly Volatility
3)ATR
4)Change (daily)
4) change from open
5)Beta
6)Weekly performance
7)Price
8)Monthly Performance
9) Quarterly performance (yearly, etc)
10)[Distance of price from moving averages]
11)Ratios and multiples of one score to the other.
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Multiples and ratio examples:
If weekly volatility is less than X
If weekly volatility is less than 1/2X
If weekly volatility is less than 1/4X
If Weekly volatility is less than 2x ATR (%)
If Weekly volatility is less than 1x ATR (%)
If Weekly volatility is less than .75x ATR (%)
If Weekly volatility is less than .5x ATR (%)
If Weekly volatility is less than .25x ATR (%)
If ATR (%)/Beta is less than 3%
If ATR (%)/Beta is less than 2.5%
If ATR (%)/Beta is less than 2%
If ATR ()% is less than 1x Monthly volatility
If ATR ()% is less than 1x weekly volatility
absolute weekly move more than -3%, less than 3%
absolute weekly move more than -2%, less than 2%
absolute weekly move more than -1%, less than 1%
Weekly change vs monthly performance
weekly volatility vs monthly volatility
ATR (14 average daily move) ratios...*
Weekly volatility vs beta
Weekly volatility overall
weekly move less than 3x ATR
Weekly performance vs beta
Absolute weekly performance not too extreme in either direction.
Distance from 20 day or 50 day moving average? (more of a signal of a "normalization" of prices or a stock NOT trending recently (or reverting from trend). This isn't always volatility contraction on it's own. It may also be a focal point OR represent predictable "channeling" or tight range for awhile. It may add some useful signals and remove other, so it's probably best used as a separate filter.)
Distance from 20 day moving average relative to some volatility metrics or price changes. (see above).
The combination of several of these metrics plus some kind of scoring system if a stock qualifies, could form a short term, intermediate term, and longer term consolidation scores.
You will have to manually eliminate some false signals, and you probably will miss some signals, but overall you should be able to quickly narrow your trading universe to some of the more clear setups.
The goal of this consolidation score IS NOT just limited to individual stocks. In fact, one of the reasons this signal can be even more valuable is after a separate filter is applied.
Spreadsheets can aggregate scores in a matter that basically say something like:
1)Take the average of an industry
2)Provide a larger bonus to industries with higher scores in a separate "group score"
3)Repeat for various "filters" that represent similar stock (industry, market cap size, sector, high beta, etc.)
4)Compartmentalize the score and provide totals to compare as well as a total scores to incorporate all or look at these separately.
An individual signal may just be a false signal. But your chances of a false signal are reduced when several other stocks are doing the same thing or at least are simultaneously setting up in some regard... Consolidated setups are only one kind of setups, but nevertheless, it's a powerful way to reduce the number of tradable stocks in tradable industries... or you can ignore this score or look at it separately.
Stocks that are consolidating together is usually a positive signal. However, there are also moments when you might try a sympathy move. You may look for a bunch of stocks that are rallying and try to identify what has consolidated and hasn't moved yet. This will have to be a separate signal, so you can rate stocks on performance on several different metrics.
How well is a stock moving relative to it's daily average? how well is a stock moving relative to its consolidation? is a stock currently trading at it's highs? Is it trading above or below the open? Is it trading above or below the previous close? Is it trading above or below a recent trading range? Is the total percentage move strong? What about the weekly time frame? Monthly? Quarterly? Yearly?
You can rate stocks that have a high performance on some longer term metric and a lot of recent consolidation for example to identify stocks in strong uptrends pausing prior to a potential continuation of the trend. Or you can just look at the very recent strength and take the total group score and find the stocks that have low relative volatility or low recent performance relative to the group. These are stocks that potentially will breakout and play catchup if they are going to participate.
It's hard to create a one sized fits all signal, so you instead should aim to have several different metrics and signals, and a process for selecting which signal you look for and finding and trading the right stock at the right time.
Having various scores and various ways to combine those scores to come up with a point system for separate metrics is a great way to do that.
Perhaps you want a list of sympathy plays sorted by the biggest difference between stock and the rest of the industry. This is great if you can actively look throughout the day and track a list of stocks looking to chase on a breakout in an environment where you think the laggards will play catch up.
Then perhaps you want to identify the industries that haven't moved yet but are consolidating together while the market rallies. You believe the market will continue, so you want to position on the NEXT group in the rotation.
Or perhaps it's a market where there aren't a lot of setups and market doesn't have a strong direction or rotation and you just want to find the individual stocks with good setups and you aren't really concerned what the industry is doing.
Perhaps you are looking for only the best longer term setups so you aren't concerned about the short term. You can filter those out
You can go through these setups as needed if you have planned this out on your spreadsheet and have a process to access them.
Additionally, going through a list of the top setups in each filter and/or tracking the ones in your past filters is also a good way to get a really good "feel" for what the market is currently favoring and also noticing any changes. You might even upload a group of stocks into a mock portfolio and track it over time and then create a new list and track that one and repeat for different lists over different time frames. Then you can see what worked and then what works next and pick up any sort of process by which stocks begin to perform.
Another thing to track is market breadth for the market, for sectors, (and possibly any industry group with more than 20 stocks). There are different ways to measure breadth. % of advancers vs decliners on multiple timeframes, % over 1% vs those under -1% (or another number). Big movers vs small movers on the upside, vs big vs small movers on the downside (are the big movers catching on more to the upside or downside on average).
