Tight Range Dictating S&P Movements

Rick_PendergraftIf you asked most investors, they would say that this year has been a crazy year so far. There have been wild gyrations, lots of big down days along with big up days. But believe it or not, every day’s closing level on the S&P 500 is within a 3.5% range.

In the first 26 days of trading for 2015, the S&P has spent exactly three days in positive territory for the year. Sure the market has been up on 11 trading days, but most of those came after a series of down days. The most the S&P has been up on a year-to-date basis so far in 2015 is 0.21%.

The end result of the 11 up days and 15 down days has been a 70-point trading range for the S&P 500. Every daily close has been between 1,992.67 and 2,063.15. The midpoint between these two levels is 2,027.91. Measured against the midpoint, we are talking about a 3.5% range. It sure does seem like the market has been moving a lot more than that, but every daily close has been within 1.75% of the midpoint of the range.

We can see the range on the daily chart with the high close, low close and midpoint lines. What is amazing is that in only 26 trading days, the S&P has crossed back above or below the midpoint line on six occasions. There haven’t even been six full weeks of trading yet this year. Talk about a market being volatile without really going anywhere.

pic 1 21015

So what does this mean going forward? The first inclination is to say that the side of the range that gives way first will be the direction the market heads in for the next month or so, but then you see the high from December as well as the low from December. Both are looming just outside the range as possible support on the downside or possible resistance on the up side.

Short-term traders that like to hold positions for three to four days should be thriving in this environment as long as they don’t have a problem with trends that are only good for three or four days.

When high-frequency quant models are in sync with a market like this one, they can really add value to a portfolio while longer-term strategies are grinding sideways. Option traders should be taking advantage of this market with the low implied volatilities meaning option premiums are low on a historical basis. Then there are the relatively new weekly options. But, if you are going to trade options in a market like this, you have to be ready to pull the plug on trades that go against you and you have to realize you are going to take some sizable losses. This is okay as long as you have enough big winning trades to offset the losing ones.

Bookmark and Share facebook twitter twitter

Leave a Comment

*