More often than you thought, the market price of a stock can display a flat line. By definition, it’s a price movement extending two to three weeks or longer, during which period the price variation of both averages moves within a range of approximately 5%. Have you wondered what that means when it’s formed?
When the line is formed
On the surface, it’s pretty simple. The reason we get a flat price means it does not change much. The people taking long positions gets cancelled out by the people taking short positions. Isn’t that obvious?
Imagine I take all the people involved as a single person, he buys in, and sells in another second, and repeat this millions times a day. If this is what happened, can you make a guess what mood this person is in that day?
Yes, hesitated, undetermined, not sure what he really want to do. In one hand, he thinks the future is bright; but in the next second, he regrets and withdraws his previous hand.
Why the line is formed
But the reality could have multiple description on the same matter. All in all, this is not a one man show. When someone is buying due to the bright side of the future, another person could be selling due to that he want to fold so that he can take the gain or cut the loss. Which means, this is essentially a consolidation where on the surface nothing happened, but internally things have changed hands. Now only more people on the brighter side is holding the stock. This is happening to the top of the market.
On the other hand, if we are at the bottom of the market. Similar thing could happen to the flat line. People could be covering due to that he doesn’t want to short the market or take his gain. Instead people who continues believing the market is going down want to start to bet on the short position.
It seems to me, if the above one is really what happens to the flat line, then it’s relatively dangerous to take sides. Because you are essentially watching two people flipping coins. There’s literally not much you can do to contribute to the winning or losing odd. It’ll merely giving you random outcome.
Summary
It’s interesting to see the flat line in the market from time to time. IMHO, we should stay at the sideline without getting involved if that happens, because the risk is high and the gain is unknown. So please go home when that happens so to have a nice sleep is what we should do.
