July 23rd, 2010

Which Trading Range?

There wasn’t much to right about this week. I could have expounded about the “trading range” everyone else was talking and writing about but then you wouldn’t have learned anything new or different. My difficulty amidst all the conversation was that I wasn’t quite sure which trading range they were referring to since you actually could point to many depending on the time horizon you were looking at.

You can think of them as one of those Russian matryoshkas dolls. You may not have known what they were called but nearly everyone has one at some time. Trading ranges aren’t complicated; they’re just another way of talking about horizontal support and resistance trendlines/areas.

Using the S&P Index as an example, I can envision 4 nested trading ranges depending on your time horizon (click on image to enlarge):

The smallest and innermost nested trading range is the one I mentioned last week. Based on the news today about the European bank test results (which everyone seems to now discount since they turned to be anti-climatic), it appears that the Index is again trying to break out above the upper boundary of that trading range. Success may come next week.

But that won’t mean that the market starts moving straight up because there will be another larger trading range that it will have to break above. And, after that, another and then another. But you have to begin somewhere and this is as good a point as any.

But here’s why everyone is still feeling queasy. Notice that the bottom of each of the ranges overlap each other. If the move through the top fails, there’s still the risk of falling through the bottom and if that happens, there isn’t any support until 950.

I feel that the clock is ticking towards the end of summer without the move down to my correction target level of 925-950. When conditions change, you have to change your strategy. I’m taking off the hedges I had and lost money on but wrote off as the price of insurance against a serious decline and started picking up a few strong, early movers.

Like the rest of you, I’m hoping that all the money that’s been parked in near 0% money market accounts will be thrown at the market and we’ll see a very strong mid-term election year rally to year-end as earlier predicted back in January.

Subscribe below or click here to learn more about help for navigating turbulent markets.
  • Anonymous

    GURU,,why torture yourself now,,just load up the Yankeemoble and do what comes natural for you..Whenever in doubt,,head south..Tell your family its a guy thing

  • Anonymous

    I hear harry dent is predicting a 1% GDP reading next week followed by a market crash.

  • Anonymous

    In your lunar cycle post, you were looking for a decline of 5-6%, to around 1026.00 on July 26.
    you strongly believed in SnP going down to 925. you have turned bullish in this current post

    In your post "New Bull Run or Sellers' Remorse Correction" you mentioned:
    While I was an early advocate of chart reading and technical analysis (I'm not going to divulge how long ago that was but, trust me, some of you were probably just in elementary school)

    GURU, this means there is some serious trouble in your tech analysis or chart reading

    Believe me, after 3 years of trading markets, I have thrown moving averages, black cross, head and foot in the dust bin.

    There is no hurry to turn bullish now, the uptrend gains reliability only after clearing the Jun Highs without any hesitation. untill then, it takes just 3 days to form a top in bear markets. (although it takes a month to form a
    strong top "process" in strong bull mkt)

    So, it is time for you to decide – elementary school student or professional trader.

    Please understand that the moving average is not a reliable tech analysis, and MA is just a fraction(1%) of TA

  • Joe

    Moving averages, trendlines, "heads and foots" (your words) are no more intended to be predictors than might barometers or thermometers when it comes to predicting tomorrow's temperature. They might tell you what today's conditions are or indicate when conditions are changing but they can't tell you what the weather will be tomorrow or next week or next month with any certainty.

    Should the weather then no long report the temperature or the barometric reading or whether it is rising or falling? It's still up to the weather person to interpret today's facts and, based on experience and other facts (historical averages, radar maps, etc.), offer best guesses as to what it might mean for tomorrow or the next few days.

    That's the most MA's, trendlines, etc., can be expected to do. Furthermore, you need practice and experience to make them meaningful, something you apparently don't have when it comes to TA.