A Pure Price Look at the Recent SPY Trading Range

Dec 12, 2009: 3:17 PM CST

Sometimes it can be helpful to pull our perspective back and focus exclusively on price without any indicators to get a better read on the current trading conditions of the market – that is particularly helpful right now as we remain mired in a month-long trading range.

Pause for a moment and look at this chart.

This is the current environment of the SPY and broader US Stock Market.  If you have been losing money since mid-November, then this is probably part of the reason.

Trading tactics change within tight market consolidations, and I refer to these phases as ‘inefficient’ trading, meaning you are having to analyze much more, play for smaller profits (even drop to the day-trading frames if you are primarily a swing trader), and are more likely to experience stop-losses.

In other words, more work for less profit.

In hindsight, it looks great – such as “Buy Long at $109.00 and exit with profit and then short-sell at $111.50” but even that would have been difficult with the gaps and three bull traps and one major bear trap (the Dubai World debacle).

New traders might want to consider trading much smaller – if at all – as long as we remain in this range as we anticipate an eventual breakout move which could be quite powerful.

As a reference, remember that in a trading range, sometimes drawing simple trendlines can give the best perspective over any price-based indicator you might be using, though oscillators are known to do ‘better’ in trading ranges.

Here is the exact same chart, only I’ve drawn in the upper boundary at $111.50, lower boundary at $109.00, and midpoint near $110.25:

Now, that looks better, but it still doesn’t make trading in this choppy environment a abundantly simple.

At any point now, price could break sharply above or beneath these established boundaries, and many times, the beginning of a trend move originates with the stop-losses of the side of the market that bet the wrong way.

Meaning, to all those ‘going short’ here at current levels, stop-losses would be located above the $111.50 or even $112.00 area, and should buyers push price into this level, we would see these stops taken out, creating further upside pressure.

This happened in early December, but buyers were unable to sustain a breakout, and my guess is that most of that upward move was short-sellers stopping out instead of new buyers rushing to get long.

See my prior post entitled “Eerie Similarities in Recent SPY Trading Range” for more insights on the current range area.

Do be careful and be aware of the larger context in which you are trading.

Corey Rosenbloom, CMT

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “A Pure Price Look at the Recent SPY Trading Range”

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  2. Bob Says:

    Great perspective… Consider this too: The two horizontal price channels truncate some price spikes. This is valid and price has been mostly contained within the horizontal bounds, but consider including the price spikes. When one draws trend lines through the absolute highs and lows the pattern is a broadening triangle (megaphone). The current bounds defined by these trend lines fall at $112.30 and $107.80 respectively.

    Also, note the gap which occured Nov. 9th. A touch of the lower bound of the megaphone would retrace to touch the gap; certianly a key chart feature that's possibly in play.

    Bob

  3. graspthemarket Says:

    Thanks for this great explanation, Cory. You make reading the charts enjoyable.

  4. graspthemarket Says:

    Thanks for this great explanation, Cory. You make reading the charts enjoyable.

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