What does it mean when trading ranges become small?
On the first chart, the 10 daily entries enclosed in an ellipse are very narrow and confined to a small sideways zone. Obviously, the markets have been encountering very difficult resistance after a rapid advance. On the second chart, I have plotted the five-day moving average of the S&P 500 trading ranges, and inverted the scale so that the smaller trading ranges are nearer the top of the chart. It becomes apparent, looking at recent history, that the peaks on the indicator coincide closely with market tops. These extremes suggest lower markets ahead.
S&P 500
Source: MetaStock
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S&P 500/5-Day MA Spread
Source: MetaStock
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(To do my Equivolume charting, as in the charts that appear in this column, I use a charting program called MetaStock. To learn more about this method, read my series of columns, Trading With Equivolume.)
Rite Aid: Buy
Rite Aid (RAD)
Source: MetaStock
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This is a lower-priced and fast-moving stock but it is usually quite active, making it interesting trade for those who are more aggressive. Rite Aid (RAD) went through a clear change in direction a month ago, and it is now moving higher with impressive volume. It has again gone through a resistance level and it appears ready for more upside. In view of the markets, I would wait to see if it pulls back a little on lighter volume and consider it a buying opportunity if it does.
Disney: Short
Disney (DIS)
Source: MetaStock
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Disney (DIS) has been showing weakness after a long and strong advance. The drop in November came on heavier volume, indicating a turn. Since then it has rallied with the market but has been unable to regain its old highs. This looks like a longer-term sell, even a short, if and when it breaks down from the recent uptrend on heavier volume.
At the time of publication, Arms had no positions in the stocks mentioned.