An explosive move is coming — here’s how to catch it
The
market continues to struggle to try and get through the August highs.
Short term I am not seeing a significant edge indicating a strong move either up
or down. Therefore, I will continue to take my signals, but play it close to
the vest until a substantial edge occurs.
Many breakout traders I’ve
spoken with over the last several months have been extremely frustrated by the
lack of follow through in their trades over the last 6+ quarters. A look at a
longer term chart of the S&P 500 will show why this is. Notice the tight range
and choppy results the market has produced since the beginning of 2004. The 1st
three quarters of 2004 were tight and choppy with a downward bias. After a
quick but tradable move up in the 4th quarter of ’04, the market once
again began to chop, though it has been with a slightly upward bias this year.
Not only has there been no strong trend, there has been no range, making
breakout trading doubly difficult. Since 1995 there hasn’t been a single year
like this. Now it looks like we’ll have two.
The good news is that
historically, tight range consolidations have often led to explosive moves. A
strong move will occur eventually. The question many traders have is “when?â€
Strong trends can last a lot
longer than most people believe. The same is true for consolidations. The
market tends to do exactly what would catch most traders off guard. In 2000,
after everyone in the U.S. had become a buy-and-hold tech bull, the market
crashed. In 2003 when people had given up on the stock market and it seemed
with the possibility of War in Iraq that things would only get worse, the market
rallied. In 2004, after several years of wild swings which people then came to
expect as normal, the market contracted. What could break it out of this range
bound environment in a big way? How about everyone being lulled to sleep and
believing the range will last indefinitely? It won’t. If you start seeing
numerous articles about why the market will continue to be range bound for
months and years to come, then you can be sure a big move is about to occur.
In the meantime, rest assured a
big move will eventually come. It could be either up or down. If you’re a
breakout trader, it is your responsibility to be ready when it occurs. Don’t
fall asleep, because when enough people do, the market will trick them all and
explode.
Best of luck with your trading,
Rob
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.