Friday, May 4, 2012

Trading in range

After only one week I have another "sell"signal on hourly chart. This is very solid indication that market is trading in range and these "buy" and "sell" signals should not be trusted since they don't work in these conditions.

One of the most widespread cliche about stock market is "buy low, sell high". Sure everybody wants to buy low and sell later at a higher price. Unfortunately many people apply this principle in a wrong way. Every time people see a stock moving down they buy since the stock became cheaper. However, many times what is cheap today is going to be even cheaper tomorrow since the stock is in a downtrend. That is the piece of information many people ignore, what is the general trend, up or down? If the trend is down don't buy the stock no matter how "cheap" it may seem. I've saw many people bragging about buying cheap stocks during the 2007-2009 recession. They all lost their shirt. So instead of "buy low, sell high" one should "buy high and sell higher" in an uptrend and "short low and cover lower" in a downtrend.

The only time you can "buy low and sell high" is when the market is trading in range. The trouble is it takes a while until you realize market is not trending anymore and is trading in range. One of the signs that market is trendless is getting "buy" and "sell" signals one after the other on hourly chart, like the market did since March. The big question is when is the market going to be in a healthy trend again, either up or down? I don't have a clear answer to this question. The easiest way to do this is to figure out what are the upper edge and the lower edge of the trading range and watch when one of this trend lines are violated. But even that is not a sure way since many times market goes outside an well established trending range just to come back in the trading range after a short while.

On daily chart I noticed a not so obvious "head and shoulder" pattern. The important thing is if market slips bellow the neck line or not (1,370). If it does, HS pattern anticipate a drop in the 1,290 area. Just something to have in mind. More important is to see if market finds support at the previous low (1,359) or not.

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