Since February the Australian share market index has traded sideways, fluctuating within a range. Caught between improving global and local growth outlooks and share prices that are substantially higher, the index is gyrating on sentiment shifts.
This action works against swing and momentum traders, and favours trading plans with shorter term outlooks and tighter profit targets. Traders unhappy with their profitability over the previous months may consider adapting their style to the current market conditions - and one key shift is to move more towards oscillators for trading signals. while many oscillators could fit the bill (stochastics, ROC, AD line etc) the example below focuses on the RSI.
Here's the daily chart:Since early April, the Australia 200 index has described two trading ranges. The outside, or major range, is between 5350 and the daily open/close highs at 5560. The inside range is 5385 to 5505. These well defined ranges, combined with mean reversion (return to the average) indicators offer a potentially profitable trading approach.
The green vertical lines highlight occasions where the index approach to a range high or low co-incided with the RSI approaching overbought or oversold readings to provide a profitable trading signal (the red vertical line shows a false signal).
The index is currently approaching the top of the inside range. However, with the RSI just above neutral, there is no signal yet. Ideally for this plan, a move towards the top of the outside range at 5560 will see the RSI hit an overbought reading - that's a more convincing sell signal.