Remember This About Trading Ranges
The
market sold off fairly sharply today as the indices were all down
between 0.7% and 1.5%. Volume was insignificant. Some buzzwords that have been
used this year to describe the market include “choppy†and “rangebound.â€Â So
rather than just saying it again, I thought I would illustrate it for you.
Below is a long-term monthly
chart of the Nasdaq Composite. I’m looking at the Nasdaq because it tends to
lead the market, both up and down. Intermediate-term investors know that
individual leading stocks are frequently Nasdaq listed securities. It is also
typically one of the most volatile of the major indices.
As you can see, over the last
seven months, the Nasdaq has basically moved sideways. When looking back for
similar periods, you need to go back to 1997 to find any period of seven months
that is even close to what we’re seeing now, and even that was more volatile
than the current consolidation. Prior to that, you’d need to go back until 1994
to see a comparable consolidation.
With the range we’re seeing so
tight, is it any wonder that the VXN.X is also around the lowest levels it has
traded at in about 10 years?
Many trend traders have had a
difficult time this year. When looking at the big picture, there should be
little doubt why this is — there hasn’t been a decent trend to trade.
What’s important to remember is
that ranges are eventually broken. This tight consolidation is already notable
on a historical chart. While I can’t predict WHEN a solid trend will emerge, I
can say that one eventually will. Periods of low volatility are typically
followed by periods of high volatility. A strong breakout or breakdown of the
current range could very likely lead to an extended move, and it will be
important for trend traders not to fall asleep at the wheel while the market
continues to chop sideways.
Good trading,
RobÂ
Â