Technical traders often look for certain specific price actions as an indication of either bearish or bullish trading. They’re not looking for stocks with choppy trading or stuck in a range, because they are looking for a clear direction; trading stocks with no clear direction is pure gambling and unnecessary risk.
In general, you want to trade stocks that are in motion, because these tend to stay in motion. There’s no need to put on risk in a market that isn’t trading off of some catalyst or is trading sideways.
For example, take a look at the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ):
In the daily chart shown here, the support and resistance lines are drawn in blue. You wouldn’t want to trade this because there is no clear direction; you can’t really see what’s likely to happen with EWZ, as it was just pinballing back and forth between its support and resistance areas. For many trading styles, there’s not a recognizable pattern to trade on here.
Now let’s take a look at a point — a counter-example — where EWZ had the motion you might be looking for.
In this chart, EWZ gapped down significantly due to political uncertainties. That in mind, this may have been a better opportunity. For example, the stock is in motion, the news is out and the ETF fell over 15% in one day. Consequently, this could have been considered as a mean-reversion trade.
When an ETF or stock is trading sideways, it’s best to avoid that. The better price action to trade is one that is clearly defined, with some news and technical patterns to back it up. Keep in mind markets don’t always have a clear direction, and you should be patient when the markets aren’t in motion and just having choppy trading.
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