Chart Provided by RJOFutures Research
If you cannot view the NASDAQ 100 Daily, go here.

Here is a daily chart of the March NQ contract. You can see that once we broke the uptrend line in Dec, we have been stuck in this trading range with one failed attempt at a breakout. It is going to be hard to take a long-term directional trade in this market until we break out one way or the other.

Taking a closer look at the daily, we can see that while we were developing this range, the MACD has been weakening. When the market attempted to breakout, the MACD made lower high. So the upward momentum that we had built on through late last year is drying up.

Chart Provided by RJOFutures Research
If you cannot view the NASDAQ 100 Daily, go here.

The S&P and the Dow have not established a trading range yet, although based on the discussion in the beginning of this article, it seems likely that they will follow the NASDAQ into a range. Looking at the charts shows that, although they both continue to trend higher, they are showing the same divergence in the MACD, indicating that momentum is slowing down.

Chart Provided by RJOFutures Research
If you cannot view the S&P 500 Daily, go here .

Chart Provided by RJOFutures Research



It seems likely with the slowdown in momentum, that the Dow and the S&P will follow the Nasdaq and enter into a trading range, consolidating recent gains. That will be a time to watch for clues as to the market's next move - continued upside or retracement.

My overall bias would be for any downside breakout to get follow-through and set up a larger retracement of the current bull move. But I would have to see confirmation from the market before I committed. In the shorter term, this could be a good environment for short option strangle players.

(An option strangle is taking a call position above the market and a put position below the market. A short strangle sells, or writes, both of these options and takes advantage of time decay if the market stays in its range.)

Other short-term players can play the market in this range, long at the bottom of the range, short at the top. If the market does break out to either side, you can get out without risking too much.

For the long-term traders, you could either wait on the sidelines for a breakout. In the futures, this is my usual approach as I tend to enter on breakouts with momentum. Alternatively, counter trend traders could look to use the trading range as an entry, allowing a tighter stop. For example, if your long-term bias is bearish, shorting at the top of the range give you a tighter stop than shorting the breakout at the bottom. If the market breaks out to the upside, you could dump the trade quickly and conserve capital. The reverse is true for those with a bullish bias. Buy the larger pullback, but be prepared to "cut bait" if the market breaks down for a larger retracement.

There is a lot of opportunity in this market for traders of all types. You just have to be able to research the market, and develop a suitable approach for your trading style. The key is quality research. Drawing squiggly lines on charts doesn't help if you don't have some solid fundamentals to back up what they tell you.

In order to provide that helping hand in the research department, RJOFutures is offering a complimentary trial to their quality research. Be sure to ask how you can get a trial to Hightower Research as well.

THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER TRADING FUTURES AND OPTIONS FITS WITH YOUR INVESTMENT OBJECTIVES.

About the Author


Chad Butler is a Senior Market Strategist with RJOFutures, a division of R.J. O'Brien. His 16 years of market experience includes option spread trading, diversified trend following, and development of a number of index arbitrage programs. Chad's published work appears in McGraw-Hill's Complete Guide to Single Stock Futures, Futures Magazine, and other trade publications. He currently writes for various commodities newsletters, including RJOFutures MarketNews and has been a featured seminar speaker teaching his various trading techniques to audiences large and small