For the past month or so the markets have settled into a trading range. For example, the S&P 500 (chart) has essentially traded between 112o and 1200 since August 7th. This has included some of the most stunning daily swings the markets have ever endured. What typically happens next after a stock or an index trades in a range for an extended period of time, is a breakout to either side of the range. Right now the S&P 500 (chart) is in the middle of its range.
So what does it normally take to breakout of a trading range and how can you trade this? Typically there must be some type of catalyst to occur in order for a range bound equity or index to breakout. This catalyst may come out of Europe and their current debt crisis, or it could come from the upcoming 3rd quarter earnings reporting season? Whatever the catalyst is, it’s imminent and should provide the required conditions for the breakout. Once the S&P 500 or any other range bound index or equity breaks significantly above the upper or lower part of its trading range with volume, that’s usually the time to take positions. In the case of the S&P 500 (chart), it appears a strong break above 122o or a breakdown below 1100 would do it.
Of course history or technical analysis does not always repeat itself, but in today’s age of computerized trading and the plethora of market technicans that follow this type of analysis, one can make a strong case.
Have a great day.