Friday about 15% of stocks (50/325) experienced the most narrow range in 4 days (NR4ID) as well as an inside day. The limiting factor was the inside day because multiple stocks open or slightly trading above Thursday’s highs. An inside day has a lower high and higher low from the previous day. Furthermore, 74% of those NR4IDs were also the most narrow intraday range in the past 7 trading days (NR7ID).
The theory is that range contraction or “rest” often proceeds the next trend day. For now, bulls and bears are very evenly matched…but one side is sure to win. Trade days are where the market opens and trades up (or down) without much intraday oscillation and covers a great distance. Trend days are responsible for big losses for those traders who refuse to see it and fight the trend. Looking for range contraction helps identify these possibilities.
The setup is simple, we don’t predict the direction but wait for the market to show its cards and trade the range expansion. We place a sell-stop slightly below Friday’s low and a buy-stop just above Friday’s high. If we are the buy-stop is filled, we modify our sell-stop to double the quantity which means we get stopped out on the initial long and flip the trade short. Same thing for the opposite direction (i.e. if initially a sell short is triggered). Also, trail a stop to lock in profits. The trade should be profitable within two days, if not and you’re not stopped out, then close the trade at MOC.
Below are the Consumer Discretionary setups that the system noted on Friday at the close. You can explore more setups on our Daily Setups menu.
Lowes with an interesting bearish head and shoulders, now consolidating below the neckline, could be leading the sector lower: