Tight Range Developed

Technical analysts have traditionally visually reviewed price charts to observe at what levels the market price made a significant reversal, forming a notable peak or trough in the price action.   When such reversals points have occurred below the current market price level, they are usually called support levels. Alternatively, when the reversal points lie above the market, they are known as resistance levels.

If a stock’s price is trading above a strong support point and below a strong resistance level, it often experiences an extended period of range trading between those levels, as buyers and sellers compete to determine which side will ultimately prevail.

A range trading strategy that could be used in trading conditions of this type would involve selling the stock as it rises to approach the resistance level, and then purchasing it back when the stock’s price falls close to its support point. Alternatively, one could buy near support and then sell near resistance, depending on which side of the range traded first.

Stop orders could be strategically placed outside of the trading range delimited by the key support and resistance levels to manage risk. Some traders will also elect to reverse their position on a range breakout to benefit from a subsequent move that targets the width of the original range.

In addition, traders might watch for confirmation in the form of buying interest showing up near the identified support level and selling activity materializing near the resistance point. Also, signs of consolidation will often appear on momentum indicators, such as the Relative Strength Index or RSI, in range trading market conditions.

Following are algorithmic scan results for the stock market that identify which stocks have developed a tight trading range and hence could provide an interesting range trading opportunity.

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