Get Ready for Narrow Ranges

At this point, the big question on every investor's mind is probably when this market will finally top? When is the right time to start cashing in on some profits?

For traders, though, who focus more on the day-to-day action, the question is likely how their trading will be affected once the market does top off.

Holiday Trading

Obviously, at some point, we will get a more significant top, and things will level off for a while. If you look back at the Nasdaq Composite over the past few years, you can see that kind of leveling-off has often happened right around the holidays.

In 2004, we had a pretty steady uptrend starting in August, and then around Thanksgiving through the beginning of December, the market leveled off.

In 2005, we saw a steady uptrend from the beginning of October until right around Thanksgiving, and then a leveling-off. So as we approach the holiday season, be aware that intraday patterns might be changing, and you'll need to adjust your trading accordingly.

Long-Term View Here's a three-year look at the Nasdaq

In certain situations, I anticipate narrower and choppier trading ranges. One of those situations is the day after an unusually wide-ranging day. Take a look at the Nasdaq 100 Trust (QQQQ - commentary - Cramer's Take) over the past few months as an example.

On June 26, it had a $1.26 range for the day. On Sept. 12, it had an 85-cent range for the day. On Oct. 4, it had a $1.17 range. On Nov. 1, the range was 95 cents. Those were among the widest ranges in the past five months.

Now look at the following days after those wide-ranging days. They all had something in common. All of them continued in the same direction as the previous, wide-ranging day, and all of them were relatively narrow days. Roughly speaking, on an average day the QQQQ might range around 50 to 60 cents, and on a narrow day, more like 30 cents. So whenever I see the QQQQ ranging closer to a dollar, I expect a narrow range the following day.

Watching the Q's Here's a six-month chart

Other situations in which I anticipate narrower and choppier trading ranges include summertime and the week leading up to any holiday. When volume is lower, things can get really volatile, and we sometimes see news-driven stocks go crazy. But anything with large institutional interest is usually neglected around that time, so ranges get narrow and the market can become unbearably slow.

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At the time of publication, Wolff had no positions in any of the stocks mentioned, although positions may change at any time.

Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of InvestingOnMomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.