Price coils are a powerful chart formation signaling traders to impending price breakouts. Searching for these set ups or recognizing them as they appear will give astute traders an edge in finding explosive price moves before they begin.

There is a trading axiom that states, "large range days lead to small range days and vice versa". It is so true. Prices moving over large swings need time to consolidate as buyers and sellers acclimate to new market dynamics.

A market's price action coils due to indecision. Buyers and sellers alike cannot agree to the issue's proper value and a struggle occurs. Price increases are sold and dips bought within a tighter range. Normal to increasing volume confirms such a struggle is underway.

Coil patterns develop through sheer apathy as well. Lack of news or reason to propel prices higher or lower leaves them drifting flat. Lower than normal volume may indicate this to be the case.

Regardless, tight-range prices have "pressure" similar to that of a coiled spring. Once the pressure is released, energy will burst beyond normal action.

A catalyst must be present to make this happen. Sudden news favorable or not is one common spark. Upcoming splits, mergers, favorable earnings report, lucrative contracts, etc. This direct effect will unwind price action in a hurry.

Indirect catalysts will create the very same results. Global events, domestic events or sector-related news will move these stocks in sympathy. Either way, coiled prices are a rally or price plunge waiting to happen.

Let's explore some examples below:

(Daily Chart, RMBS)

Even volatile stocks like Rambus need time to catch their breath after large swings. As we can see above, some don't rest for long.

Coils can be horizontal or vertical, which form flags, pennants and wedges. Horizontal coils have a slight tendency to follow the same direction upon breakout that they entered the coil into.

As shown in late May, that wasn't the case when RMBS put in a most recent bottom. Conservative traders should wait for a convincing breakout confirmed by higher volume before entering these trades.

False breakouts also occur as shown in mid-August. Using these chart patterns in combination with other technical studies will eliminate many "head-fake" moves.

(Daily Chart, ONE)

As covered in previous "Flags & Pennants" section, these are price coils formed in vertical shapes. Curiously, some markets tend to create flat, horizontal coils while others predominate vertical patterns.

Slow-moving issues usually create flat coils while volatile stocks, always on the move, tend to form vertical coils instead.

(Hourly Chart, JPM)

For Elliott Wave students, the classic five-wave pattern is a powerful coil when identified. Starting from the lowest point, each leg of the coil is tighter than the previous until breakout occurs from the fifth leg or wave.

Confirmation with strong volume makes this an extremely high- odds trade. Enter above the peak of wave #4 and place a sell stop to protect a bit below the bottom of wave #1. If the pattern holds true it will often be a significant move!

(Hourly Chart, WMT)

WalMart tends to trade in horizontal fashion as true with most slower-moving markets. The power of coiled breakouts remains in effect as witnessed with these examples within.

(Daily Chart, HON)

Even the sleepiest of stocks hold fast to the laws of price coil pressure. For a long time, Honeywell traded within a defined $5 range. No reason not to. Yet pressure was created out of indifference.

Adverse news sent this range-bound stock on a slippery ride down $20 or 38% in the blink of an eye. Can we see where apathy made for the build up of pressure released by a catalyst? Beware the range-bound stocks!

Price coils are common chart formations. When identified they warn of significant pending price action. A breakout of coil patterns confirmed by rising volume and other tools is a highly successful trading approach.