Tuesday, June 21, 2016

061716 MestaStock - Trading Range Market Conditions S&P500 Index chart


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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