Step two – The Set-up
Looking for the perfect set-up requires an understanding of what the chart of a stock’s price should look like before you buy that stock. A trader needs to look for the same set-up time after time, much like a golfer on the tee taking his stance prior to launching into the actual swing, Once the swing is made, or the stock is purchased almost anything can happen.
When looking for the set-up in a chart you need to understand the following:
1. Price resistance
2. Price consolidation
3. Volume
4. On-balance-volume
5. Continuation pattern
Price resistance: The chart shown below clearly shows price resistance over a period from April to September. So for a period of six months prices could not break over the resistance line that I have drawn.

Price consolidation: The period from April through to September is what we call price consolidation. Basically just sideways price movement while investors in the company await more news.

Volume: The first issue when looking at volume is to ensure that there is enough volume for you to enter and exit the stock without any difficulties, however volume can tell you a lot about the sentiment surrounding the price movement. You want high volume accompanied by higher prices. This clearly demonstrates that more and more buyers are willing to pay higher and higher prices. Volume is shown by the vertical lines in the bottom panel of the chart below
On-Balance-Volume: OBV as it is known is a computer indicator (available in most software applications) that measures whether the buyers or sellers are in control of the price. OBV measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. OBV was developed by Joe Granville and introduced in his 1963 book, Granville’s New Key to Stock Market Profits.
It was one of the first indicators to measure positive and negative volume flow. Chartists can look for divergences between OBV and price to predict price movements or use OBV to confirm price trends. The On Balance Volume line is simply a running total of positive and negative volume. A period’s volume is positive when the close is above the prior close. A period’s volume is negative when the close is below the prior close.

This chart shows the volume and on-balance-volume during the same period as the previous price chart. The volume is represented by the vertical lines shown below.
The on-balance-volume indicator is the unbroken line.

Putting the two charts together gives the following picture.

What can we read into this chart?

1. At the left side of the chart we can see a big price two day price rise accompanied by big spikes in volume and a rise in on-balance-volume. This is all very bullish and has clearly come about by an unexpected news item. It is very unlikely that you would buy or own the stock during this sudden price jump.

2. Prices then settle and move sideways for nearly six months. Prices consolidate between .035 and .064 cents. Volume during this period is quite low indicating a lack of interest by investors.

3. The on-balance-volume remains incredibly steady, indicating equilibrium between buyers and sellers.

4. Towards the end of the chart we can see increasing volume for a couple of days before prices finally burst through the resistance level. On-balance-volume increases simultaneously indicating that the buyers are back in control of this stock.

5. This chart is an example of “bottoming action” where the price forms a bottom before finally making a move to new highs.

Continuation pattern: Continuation patterns tend to be more reliable than reversal patterns. This simply means that prices have been rising then a period of consolidation occurs before prices continue their way upwards.

This pattern appears in charts on all exchanges and at all price levels.