The Dreaded Range
The market has gone nowhere over the past few months. And the trading conditions have been anything but easy to manage. Despite the troublesome circumstances the market will begin a new trend soon; and when it does you had better be ready.
Technicians, technical analysts and traders use charts to analyze a wide array of securities and to forecast future price movements. The most important chart pattern is called the trading range. This is the space between the highest and lowest price that a stock typically reaches within a period of time.
It's been estimated that stocks spend as much as 80% of the time doing absolutely nothing. And that means most of the time your investment money is just sitting there, trapped between short-term support and resistance.
The top of the trading range is called resistance, because it is known as the price limit within the current trading range. It is the highest price that buyers have recently paid. Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.
The logic dictates that as the price advances towards resistance, sellers become more inclined to sell, and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance. If resistance is ever passed, technicians see that as an indication that the price may rise further.
Conversely, the bottom level is called support. This is the lowest price that a stock has recently traded at. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy, and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. If a stock's price falls below current support, it may signal a declining trend to a lower trading range.
As a company grows the trading range, also known as the channel, will change as well - hopefully to the upside. The trading range defines volatility and also serves as the benchmark for most other indicators. For example, when a stock trades within a very narrow trading range, volatility is said to be low; meaning the market risk is lower. But risk has a flipside, called opportunity. So a stock with a narrow range has both lower risk and lower opportunity.
Recognition of key support and resistance levels is essential for successful technical analysis. Although it is sometimes difficult to establish exact support and resistance levels, being aware of their existence can greatly improve analysis and forecasting power. Channel or trading ranges play an important role in determining support and resistance as turning points or as continuation patterns.
The channel is one of the most basic technical patterns. For more information about basic technical analysis and how to use range channels to identify trend, check out the instructional video, "Introduction to Trading Channels, Resistance and Support" here.
Where do you think stocks are headed next year? Please drop me a line sometime today at marketforecast@wyattresearch.com.
