Wednesday, July 08, 2009

Avoiding Getting Chopped Up in Range Markets

When I talk with traders before the market open, it's common to hear their bullish or bearish expectations. Rarely do traders actively plan for a range bound trade, even though range trading is every bit as common as trending trade.

Today, thus far, we've seen several early signs of range trade:

* A clear overnight range;

* A mixed pattern of strength, with large caps outperforming small caps and NASDAQ shares;

* Relatively modest NYSE advance/decline numbers for the day;

* Mixed sector performance, with financial and tech shares underperforming and energy and materials shares outperforming;

* Oscillation of price around the value-weighted average price;

* Below average first half hour volume in the ES contract.

Knowing the signs of range markets that set up early in the day can help you avoid buying and selling anticipated breakouts from the range and getting chopped up in the process. It's another example of how accurate identification of the day structure is key to setting up good trades.