Buy Signals Sell Signals: Strategic Stock Market Entries and Exits pdfdrive com

A range bound market is one that moves inside a fairly defined price range
over a certain length of time. It is a market with a price resistance level where

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current position holders are ready to sell at that resistance level to lock in profits,
and possibly wait for lower prices to buy back into the market at a later time.
Resistance levels are the price where buyers are not willing to step in and drive
prices any higher. Resistance is where buyers lose interest and sellers are ready
to lock in profits. Range bound markets have price support levels where current
position holders are not willing to sell any lower and buyers are ready to step in
and take a position.
While the resistance and support levels are not exact, they usually fall into a very
close range and can be defined by horizontal trend lines based on repetitive price
action to those levels. Technical indicators can also act as key indicators as
resistance or support. For example, the RSI (Relative Strength Index) can signal
resistance near the 70 RSI and support at the 30 RSI on the daily chart during
range bound environments, especially in stock indexes and big cap stocks.
Buying price weakness and selling price strength are the profitable signals in
range bound markets, or said another way, buying near support and selling near
resistance. Range bound markets come before and after trends in most cases. The
transition from range bound to trending is signaled by price closing above
resistance or below support. In many cases, once a price range is broken from
the upside the old resistance becomes the new support. When support is lost and
a new downtrend begins, old support can become the new resistance. Many trend
following trading signals and momentum signals are built on the breakout of
trading ranges. Trend and momentum signals are trying to enter when there is a
high possibility of a new trend beginning.
When you are drawing horizontal support lines they must always go from left to
right. You are looking for a future confirmation of a new trend line. The more
touches you have without it being broken, the more valid the resistance or
support line becomes. An intra-day breach of a line is not confirmed for me until
it closes above or below that line.
In this example, you can see $SPY made a new high in May of 2015, replacing
the old resistance as the new price level held as resistance for the next three
months. The old resistance held back rallies in late July and August. Two levels
of support also put in a floor for lower prices as this market remained range
bound. Stock indexes and slow growth big cap stocks tend to stay range bound
the majority of the time, while growth stocks and commodities can have very
strong trends.

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Charts courtesy of StockCharts.com.
Markets in uptrends are defined by higher highs and higher lows. The emotions
that dominate bull markets are hope and greed. Often, true bull markets are
making new all-time highs in price. The stronger the uptrend, the shorter the
moving averages that will support it on pullbacks on the way up. The long-term
support for a bull market is typically the 200-day simple moving average. While
this line may be lost at times, it is usually regained quickly and the uptrend
continues.
Bull Markets have no long-term resistance levels. They consistently make new
highs in price. A bull market is caused by an asset class being under
accumulation, so when stocks are being accumulated the stock market is in a bull
phase. Bull Markets tend to start down in the morning and end up at the end of
the day. This is profit taking in the morning and then accumulation in the
afternoon. Bull Markets typically end when buyers are exhausted and when the
majority has taken their full positions in a market.
Breakout signals and buying dips when price pulls back are typically profitable

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in bull markets. Uptrends can be very strong due to the lack of selling pressure
with stop losses and trailing stops not being hit, and the need for short sellers to
continue to cover their short positions at higher prices. The primary selling
pressure in bull markets is profit taking.
In this example, you see a clear uptrend on a daily chart during the bull market
in 2013. The rising 50-day simple moving average provided the first level of
support in this uptrend, and the ascending 100-day simple moving average
provided the secondary level of support as this uptrend was confirmed
repeatedly.
Charts courtesy of StockCharts.com.
Downtrends are defined by lower highs and lower lows. The emotion that
dominates bear markets is fear. Downtrends are not as smooth as uptrends
because they are mixed with outsized plunges due to fear and strong rallies due
to short covering and dip buying by people trying to catch the bottom. The large
drops during downtrends can be triggered by stop losses and trailing stops being
hit. This causes a chain reaction of sell orders compounded by short sellers
adding fuel to the fire. Bear Markets are caused by the distribution of an asset

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class. In Bear Markets, the primary signals that work are selling short into
strength and buying only the most oversold dips. There are times (in extreme
downtrends) when selling short into weakness can work.
Here is an example of Apple stock in a downtrend in the second half of 2012.
Notice that the 21 day EMA and the 10-day SMA both acted as descending
resistance as Apple made lower lows. It fell quickly from the $700+ level for no
fundamental reason. The decline was interrupted by one rally that lasted for 10-
days, and then fell back under the downslope moving averages and made fresh
lows.
Charts courtesy of StockCharts.com.
These charts are examples of letting the price be your guide in trading the price
action on the daily chart. People that traded the chart with the right key moving
averages and technical indicators suffered far fewer losses than investors that
were stubbornly on the wrong side of downtrends, or traders who had bearish
opinions in a bull market.