Ranges occur when the price of a stock is bound between an upper ceiling (resistance) and a lower floor (support), which it can't break through. The price channels back and forth between these areas establish the price range. In hindsight ranges can look easy to trade, but don't be fooled. One of the major issues is that the price doesn't usually stop and reverse at the exact same price levels as it did before. This can make defining entry points, targets and stop losses tricky. To help remedy this, use volume analysis and wait for signs of a reversal near resistance or support areas before jumping in.
United Technologies Corp. (UTX) has been ranging since March, even though the long-term trend remains up. Resistance is between $120.19 and $120.66. Support has developed between $113.54 and $112.32 (all unadjusted prices). The price may move slightly beyond these levels, or reverse just shy of them on the next attempt. Each side has been tested multiple times, and volume hasn't increased near the breakout points. The trend is up, so ideal trades are taken in the support area, following an up day which shows support has likely held. Place a stop below the recent low. Target is near $120 based on the range, but if the price breaks higher the trade can be held for a larger gain based on the up trend continuing. (For related reading, see: 3 Points of Validation for Any Price Breakout.)
Genuine Parts Co. (GPC) has been ranging since mid-February. The longer-term trend is up, but has been very choppy going back to May 2013. The price is currently testing the resistance area between $90 and $88. Volume is near average and will likely need to increase – combined with a strong up day – to break the range. If volume remains subdued, wait for a down day to indicate that some selling pressure is present in the resistance area. Place a stop just above the recent high and a target near $84. Support is between $83.84 and $83.43. Given the slight uptrend the long has a slightly higher probability of success, but only marginally so because the price has been so choppy over the last year. Watch for a test of support and then buy following an up day. Enter a stop below the recent low and a target near $88.
Darling Ingredients Inc. (DAR) has been range bound since December, and currently testing resistance between $21.30 and $21.85. The price has already been rejected from this area in late June, indicating the range is likely to hold. In July the price has been creeping back toward resistance, offering a second chance short entry with a stop above $21.50. The downside target is $19.50 to $19.25, just above the support area at $19 to $18.66. The trend outlook is mixed, so long trades near support (with a stop just below) or a short trade, as described, are both valid. This is assuming there isn't a breakout on high volume; low volume breakouts will likely fail and confirm the range trades.
Avery Dennison Corp. (AVY) gapped higher last November and has been moving within a range since. The price action has been choppy, but there is well defined resistance between $51.92 and $52.24. The overall trend is up in the stock, so taking a short position in the resistance area goes against that trend. A potential upside breakout – above $52 on high volume – may be worth keeping an eye on. In the event the range continues, support is between $46.65 and $46.03. If the stock reverses higher in this region, look to go long with a stop below the recent low and a target near $51.50. (For related reading, see: Taking Advantage of Missed Breakout Opportunities.)
The Bottom Line
Ranges can be lucrative, as they offer trades with relatively low risk compared to the potential reward if the range continues. They look simple, but can be tough to trade in real-time. View support and resistance as price areas, not specific prices, because rarely will price stop and reverse at the exact same level(s) as before. An increase in volume should typically accompany a breakout, so if volume remains subdued while the price is in a support or resistance area there is a greater likelihood the range will hold. Price reversals near support or resistance help highlight that the range will continue. Stops can be placed just outside these reversal points to control risk, with targets near the other side of the channel. Only risk a small percentage of the trading account on any one trade, that way a single loss doesn't significantly draw down your capital.