Monday, February 09, 2009

Recognizing Range Days in the Stock Market

If you take a look at today's Twitter posts, you'll see that early in the morning, I raised the issue of range bound trade for the day. A range day is one in which the market oscillates above and below an average price that represents the market's evolving estimate of value. As I outlined in an earlier post, I use volume-weighted average price (VWAP) for this purpose.

Once you identify a range day and its "fulcrum"--its average trading price--then your strategy for the day is to observe moves away from this average, gauge the interest that higher or lower prices attract, and--if we do not see an influx of fresh buyers or sellers--fade those moves for a return within the range. This is where relative volume (see my indicator update for the latest volume benchmarks) is quite helpful. When markets see lower than average participation on moves away from the average price, it means that large traders are not accepting the higher or lower estimates of value. It is this lack of acceptance that leads to retracements back into the range--those oscillations around VWAP that characterize range days.

There are many other clues regarding range days, including mixed performance among sectors, modest advance-decline pluralities (a relatively even level of advancing and declining stocks), and a failure to break out of an overnight range early in the trading day. Once you have observed enough range and trend days, you become sensitive to these clues and more able to act on them early in the session. I've received favorable feedback about the Twitter posts in this regard (free subscription via RSS) and will continue to post morning market observations when I am not on the road and working with traders.