Why I Study Range

• Posted by Derek
• on September 10th, 2010

I’m not a daytrader, but I do drill down to minute details when inflection points arrive.  For me, that starts with a new 20-25 day high or low…I consider this the equivalent of 1st and Goal.  There is a high level of emotional interest, and the winner of this battle indicates which side has control.  As Brian Shannon says quite often “from failed moves come fast moves”…there is a lot at stake when a stock or commodity lies in this region.

On one hand, you have trend following models based on the original Turtle experiment looking to follow these breaks, while the other side is full of faders following methods like Linda Bradford Raschke’s “Turtle Soup”.  Much of the economic data lies on a monthly calendar, so expectations tend to get priced and repriced over this duration as well.  Besides our own biases, how can we tell if a breakout is real or fake?

I think great tools exist in volume and range.  I know volume gets much more attention, but range is equally valuable in gauging the energy behind a move.  While a breakout can live without one of those two, I don’t put much faith in one that has neither.

Think about the dynamics behind a breakout…there is either extraordinary demand overcoming doubting faders, or there is a limited supply of stock preventing prices from going higher.  In the first case, we’ll see explosive volume accompanying the price move.  But in the second, volume may be light…this is where range comes in.  If buyers are motivated but sellers limited, price should move far more than average in order to facilitate trade at higher levels.

How does that apply today?  On Thursday we made a new 21 day high.  Volume ran about average right from the start according to my measure.  I needed range to confirm if this was indeed “the real thing”.  But 15-20 minutes in, despite gapping to highs on better jobless data, $SPY range ran just below its 7 day median true range and even more below its 21 day figure.  I took this as an indication that, absent a major development on the fiscal or monetary front, we didn’t have the energy to sustain a breakout.

Does that mean we’re doomed to a reversal?  No, might have simply been a preemie break that wasn’t quite ready.  The intermediate-term dynamics are strong enough to give it another couple of downs before throwing in the towel…once volume or range expand we can assess who has control.  More important than a break is assessing what happens after the break.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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