How to Play a Slow, Choppy Market

Editor's note: This column was originally published on RealMoney on Feb. 5, 2008 at 4:29 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

How do you play a slow, choppy day?

Yesterday [Feb. 5] we saw momentum in the Nasdaq slowing down to a crawl. The Powershares QQQ Trust(QQQQ Quote), which I use as my general market compass, had an intraday range of 67 cents. By comparison, the average range since the market bottom on Jan. 23 has been almost double that, at $1.30. Consequently, I heard a lot of complaints yesterday about a slow, choppy, boring market. How does a momentum trader adjust to those conditions?

The first thing you need to do is recognize as early as possible that you may have a low-momentum day ahead of you, so you can adjust your trading strategy for the day. First impressions can tell you a lot about a person, and they can tell you a lot about a market, too.

Two things clue us in to early momentum: the volume and the gap. The first thing I look at is general volume. If there is no volume, then you can pretty much figure that no one knows, or no one cares. Since the Fed announcement on Jan. 30, general volume has been declining, and premarket yesterday, volume was noticeably absent. That is our first clue that we may have a narrow day ahead of us.

Next, take a look at the early price action in QQQQ over the last three days. On Jan. 31, we started the day out with a 50-cent gap down to start the momentum, and during the first 30 minutes or so, the early range was already 30 cents. That is 80 cents of early momentum, which widened out to $1.77 for the day. On Feb. 1, we started with a 39-cent gap, and the early range was 61 cents. That makes a dollar in early momentum, and the intraday range was also a dollar. Yesterday, the gap was only a penny, and the early range was only 29 cents. That is our next clue that we may have a narrow day ahead of us.