Technical analysts and traders have traditionally used moving averages to help smooth out the price action and clarify the market’s underlying trend. Also, a trading strategy that uses moving averages involves watching for a stock’s price to trade between the value of a long term moving average, such as its 200 day moving average, and a medium term moving average, such as its 50 day moving average.
When a stock’s price is trading below its 50 day moving average that represents resistance, but above its 200 day average that provides support, the near term market often finds itself caught between the medium term bears and the long term bulls. The typical result that ensues is a period of range trading, as supply and demand factors compete to ultimately determine which side prevails.
A range trading strategy that could be used in trading conditions of this type would involve selling the stock as it rises to approach its 50 day moving average and then buying it back as the stock price declines to near its lower 200 day moving average, or vice versa. Stop orders would then be placed strategically outside the range delimited by the moving averages for risk management purposes.
Traders might also look for confirmation such as buying activity showing up near the 200 day moving average and selling activity near the 50 day average. Also, signs of consolidation will often appear on momentum indicators like the Relative Strength Index or RSI in range trading markets.
Please find below the algorithmic scan results for the stock market that identify which stocks are currently trading just below their 50 day and just above their 200 day moving averages and hence could provide an interesting range trading prospect.
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