Yesterday's article sparked many positive email responses, and a recurring question
was posed: How do you know when the market is trending or range bound? Today's we'll
look at some indicators that I use to spot trends versus how to trade the ranges.
Before objectively defining indicators, I often ask "Is this a breakout market or a
fakeout market?" In today's current conditions, many traders will agree that we are
currently in a noisy "fakeout" market. Just when it looks like you are seeing a
breakout to the upside, it fakes you out and moves back down. And just as it looks
like we are taking out the lows to break down, the market fakes back up.
In trading these fakeouts, or extended trading ranges, I think the best indicator I
use is the Momentum Divergence method I developed (for a full chapter on these
divergences, check out Chapter 8 of Big Trends in Trading). What I've learned (the
hard way!) is that breakouts that are not confirmed by the underlying momentum of the
market usually turn into fakeouts. The Momentum Divergence indicator helps me spot
when the trends in both Price and Momentum are in synch, versus when they are showing
significant divergences.
I also look at my Acceleration Bands indicator to determine trends versus ranges.
When a stock is in between its Acceleration Bands, it is locked in a predicted range.
It's the breakouts outside the bands for two straight closes that often signify the
start of a significant trend that tends to last longer than most traders expect.
In addition, the Stochastics method discussed here last month is a good indicator of
both trading ranges and trends. Usually most people use Stochastics as an
overbought/oversold indicator, selling when the stock becomes overbought at 80% or
higher while buying when the stock becomes oversold at 20% or lower.
A case study on the recent gap in Ahold (AHO) shows why you should wait for the turn
up in the Stochastics %K above its %D line. This chart shows the 21-day %K and
10-period %D reading, with a 40-day Momentum Divergence in the second pane, and the
80-day Acceleration Bands plotted in green around AHO's price chart. You can see
that back in December when the stock was in between its Acceleration Bands, buying
near 20 and selling near 80 would be acceptable in a range-bound market. But as the
stock broke under its lower Acceleration Band more recently, the Stochastics
continued to get more deeply oversold preceding the massive gap down in the stock's
price from over 10 to under 4. Anyone buying the dip under 20 in the Stochastics
would have been crushed. Wait for the turn in Stochastics followed by the price
confirmation to make sure you stay on the right side of these bigger trends.
Daily Chart of Ahold (AHO)
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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