When stock prices start to move within a certain range, falling to established lows and then rebounding up to established highs, meet with resistance, and fall back again, the stocks are said to be in a consolidation or congested phase.

Most of the time, typical consolidation patterns can be seen, with the most common one being the rectangle pattern or sometimes called a price "corridor" or channel.

When prices start to drop, traders get nervous and weak holders will sell their stocks so that they will fall to a support level which other traders will consider a good price to buy. From that level, stock prices will then rebound, often with volume as support comes into the stock.

As the price of the stock improves and increases, it will reach a peak where traders who have purchased the stock at lower prices will sell. At the same time, weak holders who have purchased the stock at higher prices may wish to bail out as their losses are narrowed with the improved prices. At that point in time, resistance is encountered and the stock price then tops over to form a peak.

When you connect the support prices and the peak prices where the price tops over, you will find the pattern of a channel or a rectangle.

During consolidation phases, prices trade within a range formed by the bottom of the channel or rectangle and the top of the rectangle or channel.

Technically, the use of oscillators will be suitable for trading within congestion phases. The key is to identify the bottom of the channel and to buy closer to the bottom of the channel and to sell as prices reaches the top of the channel or rectangle.

A common mistake newer traders commit is to continue to use their trend following trading system during a congested phase and encounter a lot of whipsaws as prices oscillate between a small range.

The first chart shows the daily SPX (black line and right scale) and the NYSE Oscillator (NYMO) 50-day MA (blue line and left scale). Previous patterns indicate when the NYMO 50-day MA falls below negative 20, then a bottom will be in place and SPX will be in position for a sustainable rally. Currently, the NYMO 50-day MA is negative 15 1/2 and the daily NYMO is negative 15. So, the daily NYMO will have to stay below negative 15 1/2 for sufficient time and levels to bring the NYMO 50-day MA below negative 20.

The vertical line in the first chart shows April 2005 technical indicators are in somewhat similiar positions compared to current indicators. In March and April 2005, SPX fell from the high at 1,229 to the low at 1,136, from early-March to late-April, before starting the uptrend. Over the current downtrend, SPX fell from the high at 1,326 in early-May to a low at 1,235 last week. The similarities indicate SPX could trade between 1,230 and 1,260 for one to three weeks and then the NYMO 50-day MA may be in position for a SPX bottom. Also, the NYSI (below price chart) may fall into position for a SPX rally.

The second chart is an SPX monthly chart that shows the monthly middle Bollinger Band, currently 1,228 1/2, has held throughout the recent cyclical bull market. Consequently, a fall below that level may indicate a greater fall and the start of a cyclical bear market. Below the price chart is the monthly MACD, which gave a bearish crossover last week. However, the crossover is valid only if it closes the month bearish. Above the price chart is the monthly Money Flow, which remains positive, although has deteriorated, which may indicate the tail-end of the cyclical bull market.

It seems most likely SPX will hold the monthly middle Bollinger Band and begin a summer rally in June. Currently, SPX is in the second longest period in history without at least a 9% correction (1,206 is a 9% decline from 1,326). Also, the current cyclical bull market, within the structural bear market that began in 2000, is of above average length. However, it seems, a 9% or more correction and the end of the cyclical bull market will more likely take place at another time, perhaps this fall or in the first half of 2007.

There are two Market Forecasts this week (also see "Cyclical Bull Market Support Line"). The first chart below is an SPX monthly chart from January 1990 to November 1994 and the second chart is an SPX monthly chart from January 2002 to the present time (June 2006). The first chart shows SPX traded above the monthly middle Bollinger Band for 37 months, except briefly in October 1992, and then fell below that level when it had a 9.7% correction. The second chart shows SPX traded above the monthly middle Bollinger Band over the past 36 months and continues to hold that level.

Unfortunately, much technical data for the early-1990s are not available. Also, much of the available data for both periods don't have meaningful relationships. However, the VIX MACD and ULT are shown for both periods. Comparing the two pullbacks, the monthly VIX in 1994 rose from roughly 11 to 21, while the current monthly VIX is slightly above 18 from roughly 11. The monthly MACD in 1994 gave and held a bearish crossover, while the current MACD gave a bearish crossover last week, although it's uncertain if it'll hold for the month. The 1994 monthly ULT held 50, while the current monthly ULT is 51. So, the technical data are mixed.

Currently, the CBOE Put-Call Ratio MAs are at historically extremely high levels, which is typically market bullish (since the put/call is a contrarian indicator). Also, the 10-year bond yield is slightly below the Fed Funds Rate, which may indicate little bond upside and limited stock downside. However, if SPX fails to hold the monthly middle Bollinger Band, currently 1,228 1/2, a larger pullback may take place. If a similar correction takes place, then SPX will fall to 1,197 (9.7% decline from 1,326). Also, if there's a similar bounce after the correction, then SPX will rise to around 1,250 within a month.

Free charts available at PeakTrader.com Forum Index Market Forecast section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

The Dutch auction, also known as a descending price auction, uses a bidding process to find the optimal market price for the stock, the highest price at which an issuing company can sell ALL the available shares.

An alternative to the traditional negotiated pricing process used by Wall Street investment bankers to set the price of a corporations' initial public offering (IPO) of its shares, it is THE method used for US Treasury auctions.

It's also similar to the method used by New York Stock Exchange specialists to set the opening price of their assigned stocks for trading each day.

Deriving its name after the famous auctions of Dutch tulip bulbs in the 17th century, it's based on a pricing system devised by Nobel prize winning economist William Vickrey.

What's so good about it? Ask Google. It's the method they used to bring their company public and it couldn't have worked out any better for all concerned.

The company obtained a better price for its stock (over $100, rather than the $45 or so the investment bankers wanted to "steal" it for their friends), the public was able to fully participate, and, as of this writing, the stock has gone to over $400!

How does it work? Let's take a look at a simple example to illustrate the principle.

Let's say a company wants to offer a total of 1,000 shares to the public. So they invite the public to bid using the Dutch auction method.

Let's further say one investor bids up to $10 for 100 shares, a second investor bids up to $9 for 200 shares, a third bids up to $8 for 300 shares, a fourth bids up to $7 for 400 shares, a fifth bids up to $6 for 500 shares, a sixth bids up to $5 for 600 shares.

Starting with the highest bid and working down, all 1000 shares will be sold at $7.

It's fair to everyone involved. It's capitalism at it's best.

So why do the Wall Street investment bankers hate Dutch auctions with such a passion?

The obvious answer is they lose control of their favorite "toy". No more fat underwriting fees, no more favored few, no more anything!

Initial Public Offering (IPO)? "Hot" New Issue?? What are your chances of getting in on the ground floor???

In my humble opinion, somewhere between zero and fuh get about it!

All you need to know about an Initial Public Offering (IPO) is: If it's "hot", you got no chance; if it's not, you can have all you want. Case closed.

Why? Because "hot" new issues are reserved for the firms' "A" list clientele.

Who's on the "A" list? Institutional money managers, wealthy customers, and desirable prospective new clients such as owners of private companies who themselves might be candidates for going public.

In other words, anyone in position to generate big commissions.

By purposely pricing the offering on the low side, they are assured of an upward "pop" when they open it to the public market. That's when they let their friends get out for a nice gain.

The issuing company accepts less capital for going public but they also gain a reputation as a "hot" issuer which the public will remember the next time the company comes back to the market for additional financing.

It also allows the companys' insiders who have to hold their stock for a period of time (called letter stock or restricted stock) before they can sell, to start off with a gain.

If, out of the blue, you're offered a piece of an IPO, chances are the "A" list turned it down and they're trying to unload this puppy on you.

One of their favorite "pitches" is that, if you buy, they won't charge you a commission.

That's really nice of them, don't you think?

Of course, they might not remember to tell you that the "underwriting concession", which is built into the offering price, is already ten times larger than the commission they usually charge.