Futures Markets and Trading Ranges

Today, September 15th, we saw the largest drop in the Dow Jones Industrial Average in six years. At times, a futures market may not have a reference point to help traders determine support and resistance levels. The spike in Wheat earlier this year was one such example. Futures traders should be conditioned to avoid fading strong trends, such as the recent rise in Crude Oil Futures, the rallies in the grain futures markets and the recent sell-off in equities.

One can use the concept of average and extreme trading ranges in order to help determine how much more a move has to offer, in terms of finding a topping or bottoming area and applying the average or extreme range to the market and time frame being observed.

For example, suppose you were wondering how much further we can expect equities to fall this week (you can apply this principle to any time frame). Well, it is absolutely impossible to predict this. No one knows the answer to this question. However, it makes sense to go back and look at weekly charts to measure the largest ranges.

Doing so for Dow Jones Futures, you will see the two largest trading ranges going back to August of 2007 were 770 and 780 points, on a weekly basis. If we were to assume that a) we will come close to that level (let’s round up to 800 points), then if the swoon were to continue, one would expect support in the area of Dow 10,450. This is based on observing the past and applying market behavior to current trading.

It is critical to note that we have no idea how low (or high, for that matter) a market will go. But, we can look at history and know times of extreme volatility produced ranges close to 800 Dow points.

There are trading systems that are built around the concept of average range or extreme range. For example, if the 21 day average range in E-Mini S&P Futures is 24 points, then traders make seek buy or sell opportunity based on that information.