Trading Range

Stocks have been locked in an ever tightening trading range since Autumn. This can be seen in the chart above. Look at how the range has narrowed in the past month. Market action has been characterized by very few sectors that are outperforming and little momentum to either the upside or downside. It seems that every time stocks look like they are going to make a move a counter trend develops. We've chronicled this by showing triangle patterns in certain indices this week. Triangles indicate that resolution could come soon to a trading range. Let's look at factors for both upside and downside below.

Tight trading ranges such as this can provide the base for a strong move to the upside if stocks break out that way. Also the more times a stock or ETF bumps up against resistance (or support) the weaker that trend line becomes. That's because the buyers who originally may have bought at that level at least have the opportunity to get out somewhere close to even. Many of these current resistance lines especially on major market indices are close to the levels from which stocks crashed last year. In other words overhead supply is being eaten away. This corresponds to certain public markets data that shows that individuals have been net sellers of stock over the past two months.

Markets also tend to stay with their trends and for this market, the trend has been up since March. Add to that the positive seasonal factors and we could see a market that makes a pretty good move at some point. That point (if I had to place a bet) could be early in the new year.

However, since this is a trading range we must be prepared for what to do if stocks break to the downside. That is why the game plan is so important. Indeed there are a few things we need to watch. Energy stocks & gold have really been hit hard recently. Stocks unwillingness to move higher could be a precursor to a stronger move to the downside, particularly if profit taking should set in either at year's end or early in 2010. Also I think it will be hard for stocks to move higher without the financial sector which has now underperformed since this summer. Fundamental and valuation factors could also be used to buttress a bearish case as based on this year's earnings stocks seem to be fairly valued by some in the 1050-1125 range on the S&P 500. Bears would also argue that the economic picture is still bleak (unemployment etc) and that conditions not only don't warrant further upside hear but stocks could head down in the new year.

I don't know for sure where we're going come January 1. I have some ideas about this which I will share with you in the coming weeks. For now we'll just watch and wait and let our indicators be our guide.

*Long ETFs related to the S&P 500, energy and financial sectors in client and personal accounts. Long ETFS related to gold in certain client accounts.