The (untold) stories of sideways ranges

Who doesn’t like making easy money? When the market is going up – there’s easy money to be made. When the market is falling? Easy money to be made. But, the test of skill comes when the market is stuck in a sideways range. There’s so much going on in a sideways range: False breakouts? Unanswered volume spikes? War stories at support and resistance levels.

I see all of this when I take a look at AAP between May 2006 and October 2008. Let’s see if we can spot a few of stories that are going on here, within this 2-year sideways range.

The untold stories of sideways price markets

Start with the most comfortable lines to draw, the support and resistance levels at $27 and $42, respectively. Even though these two lines capture most of the price fluctuations, we have to ask ourselves: “How confident are we in these lines?” The resistance level at $40.5, while touching the tops of May 2006 and April 2007, we can see how we got a false breakout in Spring 2008. Let’s take a closer look at what’s going on here.

False breakouts

If we zoom in closer, we can see the initial breakout was strong, but the volume was nothing spectacular. The story is in the clustering of the candlesticks that followed the breakout.

How strong was this breakout? The bulls just couldn’t keep this level.

Can you see any strong bullish followthrough? Because I can’t. All the following price bars were lacklustre. The single bullish candlestick was near the bottom of the clustering range. That tells me that the bulls were trying hard to keep price buoyed above the resistance level. The bull story was muted with the long lower shadow.

There’s a lot of indecisiveness going on within this price clustering. Ultimately, the decision was made, and the bulls just weren’t strong enough to hold onto this breakout, and the market took the price down in September 2008 and back into the sideways range.

One quirky thing I’ve picked up over the years is taking a quick look at the ratio between bullish and bearish candlesticks. I’m not counting bars per se, but I like to get an overall feel of the bull vs bear landscape. Take, for example, the larger white bars within this range. I’ve enlarged a few of the notable bars which I notice at first glance.   

What’s going on with all the upper shadows on the bullish candlesticks?

While these candles are strong, white-bodied, notice the commonality – the long upper shadows! The bulls had taken price upwards only to have the bears retrace the price from the peak. There’s no need to read heavily into this investigation as we are still within an indecisive sideways range. I just like watching the tennis match between the bulls and bears and how the price is affected as it spins within the sideways range.  

Let’s take a look at the bearish candlesticks. Just as we saw on the bullish bars, many of the black bars have shadows on them as well. However, what is different are the strength of these long, heavy, black bars. There was no second-guessing on the bears – they came together to take the price down. To me, the upper shadows show periods when the bulls attempted to drive price higher, but couldn’t hold onto the gains.

Look at the strong, long bearish candlesticks (many with shadows)

Notice the harmony and momentum of the bearish candlesticks. Whenever the bulls tried to take price higher, in particular, near the resistance levels of May 2007 and September 2008, bears came together and forcibly took shares back down.

Do you see the intermediate runup in November 2008 when the bulls managed to stage a mini-rally within the sideways range, only to get strong bearish resistance.

Bears drove price down whenever the bulls tried to stage a rally

From my own experience, it has cost me quite a bit to bias myself, and speculate the outcome of whether the price will break above of fall through a sideways range. While I sit on the sidelines for a conclusion, I’m fascinated to see the story unfold as to the action within the range.

The bulls had a few opportunities to clear the resistance but on little volume. The bears, on the other hand, quickly closed these possibilities. However, they couldn’t drive prices close to the $27.5 support level.

The story comes to a final chapter, as we can see the bears eventually tear through the $27.5 support level – on heavy bars and volume.

The bears eventually close price below the sideways range on strong volume.

This conclusion doesn’t surprise me as we saw the strength of the bears (as a collective) in their price habits even throughout the sideways range.

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