From the npm-link documentation:

In the local module directory:

$ cd ./package-dir
$ npm link

In the directory of the project to use the module:

$ cd ./project-dir
$ npm link package-name

Or in one go using relative paths:

$ cd ./project-dir
$ npm link ../package-dir

This is equivalent to using two commands above under the hood.

Since asked and answered by the same person, I'll add a npm link as an alternative.

from docs:

This is handy for installing your own stuff, so that you can work on it and test it iteratively without having to continually rebuild.

cd ~/projects/node-bloggy  # go into the dir of your main project
npm link ../node-redis     # link the dir of your dependency

[Edit] As of NPM 2.0, you can declare local dependencies in package.json

"dependencies": {
    "bar": "file:../foo/bar"
  }

npm pack + package.json

This is what worked for me:

STEP 1: In module project, execute npm pack:

This will build a <package-name>-<version>.tar.gz file.