The Markets

Oct 18, 2011 | Blogs, Daily Financial

Terry Sawchuk Founder & Chairman & Langenstein Wealth Terry Sawchuk Founder & Chairman

What is Technical Trading and how does it work? Since it involves numbers and charts many people shy away while Engineers and Accountants seems to flock to this like bees to honey. There are many terms and even more ways to look at charts. In this newsletter, we are going to focus on the Trading Range.

A Trading Range has a top line known and the “resistance level” and bottom line known as the “support level.” In the example above the resistance level for the S&P 500 is at 1200 points while the support level is 1120 points. The S&P 500 has been trading in this range since early August. Since August each time the S&P 500 reached 1200 points there was resistance to go any higher. Each time the S&P 500 fell to 1120 points there was support to keep it from falling further. It has to be said, past performance is no guarantee of future results. Since crystal balls and genies granting wishes are hard to come by it is important to look at charts as they help provide trends and possible direction.

Why has the S&P 500 been stuck in this trading range? There are many possible reasons which could include: the debt issues in Europe, economic growth or lack of growth in the US, and discussions of worldwide recession. Each of these items clearly has an impact. Another item that has a huge impact is high frequency trading. High frequency trading accounts for between 60%-70% of the trading volume today as reported by Bloomberg. Computers are programmed to make hundreds of thousands of trades per second. These very same computers are also programmed with the support and resistance levels for specific stocks and indexes. Thus, when a stock or index hits the resistance level the computers put in more sell orders than buy orders. This tends to push the markets lower. The reverse happens when the markets drop to their support levels.

What will force a breakout to the upside or the downside when a market is seemingly stuck in a trading range? Something needs to happen to force the programmers to change the limits of the high frequency trading computers. That something could be another round of quantitative easing by the Fed or a stimulus plan enacted by the Eurozone, stronger than expected corporate earnings, or better than expected economic data. Outside influences such as economic fundamentals and/or government policy influence market direction and the computers need to be “told” how to handle the new information.

Using technical charts to trade, including the use of trading ranges, is in no way a guarantee to successful investing in the markets. Charts only tell you what happened in the past and provide trend lines for those past events. However, these tools remain necessary for providing possible direction in the markets when high frequency trading accounts for such a large percentage of market activity. There are 4 very basic questions that need to be asked when investing; what to buy, when to buy, what to sell and when to sell. Understanding Trading Ranges is one way to help answer these basic questions.

Best regards,

Terry Sawchuk

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* All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* Investors cannot invest directly into an Index.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Consult your financial professional before making any investment decision.

  • Past performance does not guarantee future results.21