Wash, Rinse, Dry, Repeat

I love to see stocks and markets stuck in a trading range. Quite frankly, they are hard to find, but if you can find one- they are the easiest pattern to trade off of. The methodology is simple. While the stock or market is caught between a fairly obvious level of resistance (the ceiling) and a level of support (floor) – you can buy off of the bottom, and look to sell at the top of that range. If the chart breaks below support, you sell. If it breaks above resistance, hang on for the ride.

When trading within the range, I wait for a bounce off of the bottom, typically 3 days, to confirm its success in that bounce. I then look to sell at the top of the range UNLESS Craig walks into my office and beats upon my head with a ruler insisting that the fundamentals will likely carry it through that ceiling. However, if markets are suggesting overbought conditions, I am less likely to be convinced. Its a discussion, at times. But that’s what makes ValueTrend work so well. Below is a drawing of a range that I stole off of the internet.

Anyhow, if the stock breaks through resistance after a prolonged trading range- it can be a super powerful move up from there That’s why its sometimes wise to see if the stock will break through. Mind you, if it shows signs of faltering, just get out. Its difficult to guess if that top will break this time – after all, its failed at that ceiling multiple times in the past. You are fighting history if you wait. But, it happens. Just take a look at the long sideways move(s)on PPL below – followed by the powerful move down upon the breakdown from that range. Note its long journey back to the top! Disclosure: we own PPL in our platforms.

 

Here are some stocks that are currently stuck in trading ranges. All are suitable candidates for range bound trading. Buy on a test of support. Sell near the ceiling, unless there is a compelling (really compelling!) reason to hope for a breakout. If the support line breaks, sell after a few days. If the ceiling once again fails, sell immediately. Simple!

Shanghai

Does’nt get much simpler than this – buy at the green line, sell at the red line.

US Small Cap’s

The Russell 2000 tends to get trapped in trading ranges. Its in one right now. These ranges – no coincidence- tend to take place during the mid point of the year when seasonal forces suggest market participants take risk-off postions. When everyone goes back to work in the fall, seasonal forces push the Russell 2000 higher. I believe you can play the bottom of the current range AND hold it for a potential breakout in the fall. We don’t own the IWM shares, but we are watching them for an entry point.

Aecon

We just finished trading this stock for the third time in 5 years. Sure, it could breakout. Craig fought me a bit on this one–but we agreed that the broad market forces are a bit bearish in August – which may push the stock back a few dollars. We’d buy it again; but for now, we scored yet another successful trade on ARE following its relatively predictable trading range. Buy near the green line, sell near the read line. Paint by numbers trading!

 

Netflix

Netflix isn’t as neat and tidy as was the IWM chart above–but you can see that its currently stuck in a very tight little trading range. Unless some devistating news comes out on the company, my bet is that this stock will break out in the fall. Meanwhile, one could consider entering at the bottom of the range with an eye on a quick n dirty (albeit not overly profitable) trade – and hope for a breakout. Place your mental stops if you decide to enter early. If it breaks below the floor- it could get ugly (the stock trades near 50 x earnings, so it ain’t cheap).

Amazon

The worlds biggest and best store has been trading in a range for a year, as it has done in the past. It tried breaking out, but the forward guidance provided by the company dampened the markets’ enthusiasm. So, its home, home in/on the range again for AMZN. Watch for a breakout or a test of the floor.

Final call for your opinion

We’ll be tallying the results of our 6-question multiple choice survey next week. Thankyou if you have participated in the survey. If you have not – it would be of great value to me if you would take 5 minutes of your time and provide me with some feedback on the viability of creating a Technical Analysis course.

Here is the link. I’ll release the findings next week on this blog. Once again, thankyou for your participation.

quote-teal

6 Comments

  • Stops:
    A couple of weeks ago you mentioned traders whip you out of stops which i don’t get.
    I find it difficult to assign stops hard or soft. It is like telling myself it’s okay to take a loss. All stocks fluctuate.
    I would have been happy with a hard stop on my gold stocks recently 😐

    Reply
    • Risks involved in what, Marie?
      Obviously stocks have risk. Lots of it. Don’t buy equities if you cant tolerate risk.
      If you are referring to a sideways pattern like discussed in this blog – the risk is that the bottom of the range is cracked. Case in point, IWM has, at the time of my writing this response, cracked below its lower support level. So you could have bought at the bottom of the range (I did!) and now its cracked. As such, you count a number of days – up to 3 weeks- to see if it stays below the support point. If it rallies back up in that period, you stay in. If it never returns in that period, you sell, take your loss and move on. Impossible to define how much a stock will decline after breaking support, so there is some instinct and experience in making this decsion.
      That’s the risk of trading!

      Reply

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