Trading Range Market Conditions
Trading Range Market
Conditions are rather rare. They do not occur on the long term trend often.
This is the most challenging market condition for Technical and Retail Traders.
It is a challenge because it seems as if the market is chaotic, volatile, or
random in nature.
Often times traders
do not recognize Trading Range Market Conditions, because they either do not
know about this condition or they do not use charts that show what is really
happening.
The chart example
below is a Weekly Chart view, and clearly shows the Range Bound pattern.
The chart example has
nearly consistent highs as if there is a Technical Resistance above price, and
inconsistent lows. Many traders are assuming this is a Bear Market, but it is
not.
Trading Range Market
Conditions occur for several reasons. This one in particular has specific
reasons WHY the big blue chip stocks are stuck in sideways patterns.
Here are the reasons
why big blue chip stocks are sideways:
1.
The price of stocks over the prior 4 years was artificially inflated, as many
big blue chip companies decided to do massive buyback stock purchases. This
removed a huge amount of liquidity of the company stock. Since stock prices are
based upon supply and demand as much as fundamentals, the draw down of
liquidity forced prices upward, as the corporations intended. However, buybacks
are a temporary event and do not last. As the buybacks ended, stocks began to
show signs of weakness in the chart patterns as far back as the middle of 2014.
2.
Fundamentals and Financials which had a huge growth out of the 2009 economic
contraction, started to slow down in 2014 at the commencement of the Trading Range.
Dark Pools who control vast quantities of stocks, started Quiet Rotation to
lower their held shares of stock in companies poised for a business
contraction. This fueled many Topping Formations late in the year 2014 and
early 2015.
This Trading Range
Market Condition was predicated, on obvious and easily seen patterns in
the charts. By understanding what was going on with stocks beyond just a mere
MACD Crossover or an Engulfing White Candle, Technical Traders who were able to
analyze the conditions were prepared for this Trading Range.
Summary
What happens next?
Trading Range Market Conditions rarely last a long time. Range bound
action is usually, but not always a continuation pattern. To determine whether
this is a continuation or reversal, it is necessary to study a longer term time
frame, thereby eliminating the “white noise” present in Daily or even Weekly
View charts.
Next week this
discussion lesson will analyze the longer term chart, to see whether this
Trading Range is a continuation pattern or a reversal pattern.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a MetaStock chart, courtesy of Innovative Market Analysis, LLC dba MetaStock
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
This weekly stock discussion is sponsored by TechniTrader.com a MetaStock® Partner
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