The S&P 500 has been in a sideways trading range
for months and strategies effective in a range-bound market can 'work' for you if this pattern was anticipated; strategies such as butterfly
spreads OR condor
strategies. I should say that I tend to be a directional
trader myself and will wait sometimes for the 2-3 or 4-5 trade 'set ups' that meet my criteria of entry only with compelling chart patterns, accompanied by oversold or overbought extremes and extremes in bullish/bearish trader sentiment
Since my days of being paid on the basis of commissions on trades are long over, I don't need to be at all influenced (even unconsciously) by trade frequency only by potential trade quality. Of course there is the factor of sometimes feeling 'compelled' to trade, regardless of a compelling reason for doing so, but that's something that can be overcome!
It was possible to see that a sideways trend could be in the cards late in 2014, if you were seeing the long-term overbought condition with major indices trading at the UPPER 'resistance' end of long-term uptrend price channels and with major indices being at long-term overbought extremes. When this picture is seen the usual outcome is either: 1.) a sideways trading range that serves to 'throw off' an overbought condition OR 2.) a pullback to the low 'support' end of the channel, accompanied by an 'oversold' condition.
This later pattern (2) sets up an 'easier' choice (again, if anticipated!); e.g., buy puts at upper trendline resistance and wait for a drop to the low 'support' end of the channel, which also sets up oversold extreme, which then suggests turning to bullish strategies. It's the sideways trend, the first (1) outcome that 'throws off' an overbought conditions over time by a sideways trend that can be the most trying when it's then hard to know how LONG a range-bound trade will go on.
It may now be time to anticipate a change in the trading range or whippy back and forth moves of recent weeks and months if this might be morphing to an upside breakout move ahead.
What's been the case for months, the relatively narrow price range illustrated by the longer-term weekly SPX and monthly INDU charts and what MAY be developing now (suggesting potential for an upside breakout) will be analyzed with the SPX and INDU daily charts.
S&P 500 (SPX) WEEKLY CHART:
To illustrate the relatively narrow 1980-2125 price range that the S&P has been trading in ('relative' to the tremendous gains that came in the in the prior 4 years), use of the weekly SPX chart is shown and highlighted. Then, from mid-February one, SPX's range narrowed in considerably, to 2050 on the downside and 2120-2125 on the upside or just 70-75 points. What this pattern suggests to me is that buyers will step in on relatively minor dips but are not aggressive buyers over 2100 as occurs when earnings slow such as in a bad quarter, etc.
The LONGER that a 'rectangular' trading range (in fact called a rectangle pattern) goes on, the more potential there is for an upside move up and out of that range. It is the case that number 1, a pause and sideways move relative to the dominant prior trend can be seen to 'throw off' a prior overbought condition. Prices may go sideways on declining relative strength as seen in a declining RSI indicator.
There's the other case where prices, after an prior prolonged advance, continue to go up but (also) on declining relative strength. This pattern is then sometimes resolved with a substantial, usually sharp, pullback to trendline support. You see both patterns illustrated in the chart below; one highlight is to the left in dark blue, the right in light blue on my first chart.
The bottom line in sideways consolidations is that they tend to resolve themselves by a resumption of the prior trend or UP in the current bull market. When/if an upside 'breakout' move occurs that takes the index (or stock) above the upper end of its prior trading range, a 'minimum' upside target or rule-of=thumb objective is for a next advance EQUAL to the prior price range. SPX 1980 to 2125 is 145 points and this added to the upper end of the rectangle at 2125 suggests a potential further upside objective over time to the 2270 area.
SPX DAILY CHART:
The daily chart just shows the narrowing of the prior price range in more detail where a new support 'floor' now is seen in the 2080 area. Higher support or a higher level of buying interest has bullish potential for an upside breakout. The more times that prices retreat from a 'line' of resistance as seen in the 2120 area, the more buying will be seen when/if there is a breakout above prior resistance. Shorts cover, buyers jump in so as to not 'miss' the market, etc.
Fear and greed are dynamics. Fear of being wrong keeps the sellers at bay when prices dip very far and fear and avarice comes in regarding not missing a move, especially among fund managers. Meanwhile, we assume cash (buying power) has been coming in over the months of the sideways trend when managers are standing pat.
DOW 30 (INDU) MONTHLY CHART:
The Dow monthly chart shows in a visually powerful way how an advance eventually shows down after such a prolonged uptrend. The Dow can be seen as having potential back down toward or to the mid-point OR low end of the broad uptrend channel; e.g. to 17000 or perhaps back to the 16000 area. On the other hand, in such a strong trend as seen since early-2009, INDU is certainly 'capable' of another advance to the upper ('resistance') end of the price channel or to the 19000 area.
I've been spinning my wheels seeing week after week that more of the 30 Dow stocks have been in corrective pullbacks or downtrends than the number (of the 30) that remain in strong and prolonged uptrends. This way of analyzing INDU has its value but I keep looking at whether there's a bullish pattern that I may be missing in a closer up view. So next up, past this chart is a pattern seen on the daily INDU chart that kind of 'jumped out' at me.
INDU DAILY CHART:
I don't usually try to 'fit' what chart patterns I'm seeing to (Elliot) wave patterns but when I do see a clear cut pattern suggested by Elliott (in his seminal work of the last century), I pay attention as to what that pattern might be 'predicting' as to a next move.
So-called triangle formations are not especially common. They take a couple of basic forms and then within each type (of triangle) there are a few variations. What I've outlined on the daily INDU chart below is one of them, that of a symmetrical 'triangle', having two trendlines that would 'converge' out into the future; i.e., as the top line is descending and the bottom trendline ascending with each descending and ascending trendline at approximately the same angle or slope making for the 'symmetrical' description.
There is in this pattern a tendency for 5 distinct 'legs' or 5 distinct price swings, both up and down, which implies that buying and selling forces are more or less in balance. The narrow and narrower price swings (the narrowing IN of the upper and lower trendlines) also suggests a type of compression.
The aforementioned price 'compression' often then leads to a thrust in the direction of the prior dominant trend. This is the rationale for the projected magenta line suggesting an upswing that carries to above and well above typically, the down or bearish declining trendline.
Seeing how well the current pattern of the time period shown for INDU 'fits' the projection for how a 'symmetrical triangle' would unfold typically as striking in suggesting how a possible move in the Dow to the upper monthly 'resistance' trendline seen above to as high as the 19000 area might come about.
GOOD TRADING SUCCESS!