Wednesday, May 27, 2009
Six Ways to Identify a Range Market
Thus far this morning, we've seen a classic range bound trade. Here are the things we look for in identifying a range day:
* Price oscillating around the open and/or the volume-weighted average price (red line);
* NYSE TICK oscillating around the zero line;
* Relative balance between volume transacted at the market bid vs. offer (bottom histogram);
* Mixed performance of stocks from their open (as noted in Twitter posts);
* Mixed behavior of market sectors from their open;
* Muted relative volume (i.e., lower than average volume traded).
When I see a narrow overnight range, I like to assume range behavior into the market open unless the market shows me otherwise. Staying patient during a range trade can lead to nice "reversion" trades at the range extremes, but can also help traders remain vigilant for the eventual breakout trade.