Trading Range Market Conditions
Why Big Blue Chip Stocks are Sideways
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 Index 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 drawdown 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 timeframe, 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.
Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a
MetaStock chart, courtesy of
Innovative Market Analysis, LLC dba MetaStock.
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Decisions Unlimited, Inc. dba TechniTrader. All rights reserved.
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