Out of One Trading Range and Into Another Jan 20

Once again, we find ourselves in a choppy, gappy trading range, and if you feel that history is repeating… it certainly seems to be.

Let’s take a look at the recent November/December 2009 ‘trading range’ in the S&P 500 and SPY and then compare that to the current mid-January 2010 trading range and note the key boundaries to watch.

(Click for full-size image)

According to the time-tested “Price Alternation Principle,” markets (price) alternates between periods of range expansion and range contraction.

The current equity market is proving that principle to be very true… for better or worse.

I know some swing traders are getting sliced on both sides of the market while intraday traders are frustrated at being thrown up and down over the last few months as well… but at least pure intraday traders do not suffer from large opening gaps the way some swing traders do.

It’s not a question of strategy, it’s a component of the ‘character’ or behavior of the market… which has been known to shift frustratingly like a chameleon from time to time.

However, if ever you feel the market is chopping you around endlessly, I recommend pulling the perspective back, removing all indicators, and focusing solely on price.

That’s what the above chart does and it puts the current market environment in crystal clear focus:

– we experienced a tight trading range from early November until late December 2009

– price broke… not very convincingly… above the upper trendline and then moved to challenge the 1,150 level

– price is now yet again forming a trading range with clear boundaries so far between 1,130 ($113) and 1,150 ($115)

See my prior post entitled “An Intraday View of the 1,150 Level in the S&P 500” which also contains the following links as to why 1,150 is important:

“Why the 1,150 Level is Important Resistance”

“SP500 Hits Monthly Resistance… but Will it Hold?”

The main idea is to ‘wait this out’ or trade intraday positions until buyers break through the 1,150 ($115) level or sellers break the 1,130 ($113) support.

Until then, odds have shifted to favor another ‘trading range’ environment that will chop to bits those who are unaware of it forming… or trying to use trend trading tactics in a range environment.

Corey Rosenbloom, CMT
Afraid to Trade.com

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