This week saw the market test the bottom of its recently established 9869-11258 trading range.  The low end of this trading range was put in place during an extreme spike down in the US indices on 6 May 2010.  This time the support level (roughly equating to the 50-week moving average) was tested during more normal trading conditions and we closed the week above the support level.  This time around there was sufficient trading time around the support level to allow sensible long-term investors to buy additional stock.

The Dow probed its 9869 support level on 25 May 2010 and fell to 9774 intra-day.  Hence the low end of the trading range now becomes a band of support in the 9774-9869 region.  Only two possible outcomes now exist for the markets – either we will break down through this band of support or eventually the markets will rally to test the top end of the trading range, allowing sensible investors an opportunity to bank some profits and top-slice their holdings once more. 

This may sound a bit simplistic but really that is all there is to do once a market enters a trading range.  Options traders have plenty of fancy strategies to pursue regarding selling volatility and entering strangles based around the trading range levels but long-term investors following the Anatomy of a Secular Bear Market roadmap should simply wait for one of the two outcomes mentioned above.

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Tags: 50 week, bear market, dow, moving average, resistance level, S and P, secular, strangle, support level, trading range, volatility

This entry was posted on Friday, May 28th, 2010 at 11:09 pm and is filed under Markets. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.