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Most of us of course like trending markets. They have long moves – up or down – and are easier to identify and invest into and we generally sleep better at night. But we can’t have our way all the time and sometimes markets have insufficient buying or selling force to move them strongly in one direction.
We are currently in a range trading mode and even though I have the view the DOW may trend higher short term and our local market may exhibit a downward bias it is quite possible both may be in a range trading mode.
One of the characteristics of range trading is that we don’t often see it until it is well into the sideways pattern.
Take a look at our local All Ords:
click to enlarge
It has been range trading since last September – in a band almost 600 points in range. Even though I believe the All Ords could ease to around 4400 this would still be within the range trading criteria.
The best way to ‘trade’ range trading markets is by using the Bollinger Band. Buying when it hits the lower band and selling as it hits the higher band:
click to enlarge
That holds true for October through to now but back in September you may have got out and left money on the table. That is because back in September the market was trending higher. Although getting out in September (had you bought in March) would have seen you make good profits, and you would have slept well in the oscillation since then.
Many may think that what we are seeing now is the beginning of a new trend and may want to hold on.
But 2010 promise to be a year of oscillation – a year of uncertainty and getting out when it hits the upper and lower band maybe conservative – but can also be safe.
Enjoy the ride
Tom Scollon
Chief Analyst
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