Trading range bound stocks

Apurva Sheth
Last time I showed you how previous highs and lows acts as supports and resistance on a chart. Emotions run pretty high when markets are at new high or low. We move from extreme euphoria at new highs to extreme despondency at new lows. These emotions are so strong that the prices get imprinted in the memories of market participants for a really long time.

Such highs or lows come only once in many years. There are other points as well which acts as support and resistance more often on charts. These are points when prices are trading within a relatively tight band/range. A trading range forms when a stock or index is consistently moving up and down between two well-defined points for an extended period of time (days, to weeks, to months). These trading ranges can form anywhere on a chart. Most of the time they would form in the middle of a trend as consolidation while in other cases they may form at the end of a trend as reversals. These points are easy to identify by simply observing price data. When a stock reverses direction multiple times from similar levels (bottom of the range - Points BDFH) it becomes fairly solid support. When a stock reverses direction from similar levels (top of the range - Points ACEG) it becomes fairly solid resistance.

How trading ranges are formed?
Source: Profit Hunter

A range becomes stronger if either side of this range is held more no. of times. Once a trading range is established one can buy at lower end of this range and sell at higher end of this range. Obviously this is not as simple as it looks. While you may enjoy trading these ranges, sometimes the stock can do the exact opposite of what you may expect it to do. You can be caught on the wrong foot. It may also take a longer time to move from the lower end to the upper end of the range. Trading range bound stocks takes a lot of patience. Those who are looking for quick profits may be disappointed by the time it takes for the stock to move its full potential. Despite all this, trading range bound stock can give consistent returns to traders. Investors who may have identified that their stock has entered into a trading range can utilize it to their advantage by adding stock at lower end of this range and selling at higher end of the range. They can continue to do so until the stock remains range bound. By trading these ranges they can bring down their cost of the original investment. Other savvy traders/investors who have knowledge of options can employ trading strategies specifically designed to gain from such movements.

Now I will show you this with the help of a couple of real life examples.

ONGC: Stagnant from one election to another
Source: Spider Software India

ONGC is one of the best example of a range-bound stock. It closed with almost 30% gains in the week when election results were announced in May 2009. Since then the stock entered in a broad trading range from 240 to 340 and decisively moved out of it only 5 years later when 2014 Lok Sabha election results were announced. (Only exception to this was in September 2010 when the stock closed outside upper end of this range around 360 levels for a couple of weeks)

On a close look one can observe that even within this broad range of 100 Rs. there are sub ranges which can roughly be divided in to 50 Rs. The bottom of this range (green line) is 240 Rs. which has acted as support throughout these 5 years. Middle band (orange line) of this range is 290 which acted as resistance in the latter half of 2011 and whole of 2012. The top of this range (red line) is 50 Rs. above the middle band, at 340. The yellow line which marks the September 2010 top of 360.

After the recent election results the stock broke above the top of this range and hit a high of 470, however it has failed to hold there and has once again reacted sharply. It is currently holding around 340 levels which acted as resistance in the past.

Reliance: Shattered Dreams
Source: Spider Software India

Many people have sentimental attachment to Reliance Industries. They have been holding it in their portfolios for a long time. I have seen many families where this stock is handed over by one generation to another. However, Reliance has shattered dreams of many of these families over the last 5 years. It has also disappointed the institutions as all of them are holding Reliance in either of their schemes. Reliance being a heavyweight is held in decent quantities across institutions. It has consistently remained an underperformer when the markets have hit new highs.

It has been trading in a broad range of 1100-700 over the last 5 years. There has been some instances when it has overshot these ranges (mostly on the higher side) during this period. However, I have used levels which were respected most of the times and could easily be used while making trading/investing decisions. Though the stock hit a high of 1267 on the back of election results in May 2009, the most time that it has traded is within a range of 1100 to 900 from May 2009 to June 2011. Once the stock broke this range it traded in a new range of 700 to 900 from June 2011 to March 2014. This time again it overshot the 1100 mark and moved to a high of 1145. However it didn't sustain there for too long and slipped back to the middle band of the broad range around 900 levels. Recently it has penetrated below the middle band of 900.

Hero Moto Corp: Breaking out of the range
Source: Spider Software India

Hero Moto Corp traded in a range of 1400 to 2200 from May 2009 to May 2014. I have split this range in two halves. The upper half ranges from 2200 to 1800. Lower half ranges from 1800 to 1400. It spent most of the time in the upper half of the range during this period. Eventually it did breakout of this range and is currently heading higher in a rising channel.

South Indian Bank: Handsome Returns
Source: Spider Software India

I came across this chart of South Indian Bank in January 2014 and selected it as one of my yearly stocks recommendations. I observed that it was trading in a well-defined band of 20-29 since July 2010. It was available at the lower end of this range in January. So, it was a good risk-reward trade. It delivered handsome returns in less than expected time.

Have you traded range-bound stocks? Do you feel frustrated when stocks languish in a range? What strategies do you during such time? Share your views in the Club or share your comments here.

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2 Responses to "Trading range bound stocks"
Apurva Sheth
16 Jan, 2015
Gr8 Going Raviraj.Like 
15 Jan, 2015
Nice article Apurva. Usually I try to avoid trading in range-bound stocks however it can't be totally avoided. In an uptrend there may be a momentary consolidation phase and if I'd like to continue in the trend then I hold to the stock patiently and add to my position at the lower band. One recent example is Igarashi Motors where it was range bound for 3 mths. However range-bound in weekly chart will certainly test my patience having said that a range in the weekly chart may provide an opportunity in 4H chart.Like (1)
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