How can you tell if a stock or an index is consolidating?

The markets go through various phases such as bull, bear and consolidation.
A consolidation phase is one in which a stock or an index moves within a specific range, between the ‘support’ and ‘resistance’ levels.
Inadvertently, price reverses from specific lower levels (that is, supports) and face selling pressure at higher levels (that is, resistances). This scenario, by and large, defines a consolidation phase.
 
Let’s delve a bit deeper into this market phenomenon and learn how to identify and trade during such phases when prices move in a range between support and resistance levels, and indicators like Relative Strength Index, moving average convergence divergence see sideways movement. Doji, Hammer, Spinning Top are some of the prominent candlestick patterns visible during consolidation.

A major trade signal called a breakout happens only when the price moves out of either the support or resistance levels.

Similarly, a stock’s major outlook can be studied on its monthly chart – longer the consolidation, bigger the price action can be expected thereafter.
Having said that, here’s how one can trade in a stock/ underlying index when in a consolidation phase.
 
The major trading signal, called a breakout, happens only when the price move out of the consolidation zone, by breaching either the support or resistance level.
However, traders should take note that unless there is a breakout with definite consecutive closes, one should not be in a hurry to ‘confirm’ the trend and take positions. For at times, a dull scenario on the charts can also result in a build-up of shortpositions.