Swing Trading the Range
Stocks continue to move sideways as of Friday’s close. The Nasdaq, S&P 500 and Dow industrials are all relatively neutral in terms of being overbought or oversold.
I recently suggested that while momentum and trend traders are taking bets on whether a bounce or continued breakdowns are most likely, swing traders should be mindful of the possibility that stocks might move sideways in the near term.
Of all the kinds of markets in which swing traders often outperform their momentum and trend-oriented counterparts, sideways markets may be the most special.
The most important characteristic of sideways markets is that they make obvious what is often hidden in trending markets. By this, I am referring to the tendency of stocks to move between overbought and oversold extremes. Stocks always do this — even in strongly trending markets. But what tends to happen in strong trends is that, for example, stocks moving aggressively higher will remain oversold for only a brief period of time compared to the time they spend being overbought.Â
The opposite, of course, takes place in strongly downtrending markets. Stocks will tend to become and remain oversold for longer periods of time, bouncing for short periods of time as traders cover short positions, and becoming overbought when too many traders believe that a given bounce represents follow-through from a successful bottom.
Whether or not we are in a sideways market remains to be seen. But with half the trading world looking for a bounce and the other half looking at the market and seeing a bottomless pit, swing traders should not be surprised if the market manages to disappoint both parties. In such disappointment lies true opportunity for swing traders.
No stocks for today. Only one stock in our Top 25 PowerRatings stocks is above the 200-day moving average — a signal from our PowerRatings that now is not the time to be aggressively taking on long positions. We will continue to wait and take what quality pullbacks the markets give us — when those opportunities present themselves.
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