Sideways Market

A sideways market, or horizontal trend, is a market phase where price rises and falls within a particular range. The sideways trend occurs as a result of the equal demand and supply forces in the market for a specific time. The aim of a sideways market is to consolidate and move in a narrow range without showing a clear trend in either direction.

Also known as sideways drift, it occurs in a horizontal channelized zone. Thus, day traders can make quick entries and exits with the help of support and resistance. In addition, sideways trading markets enable neutral risk during the period. However, due to excess trades, the transaction costs can increase. 

• A sideways market is a stock market phase where the price rises and bounces back within the upper and lower limits. It causes a horizontal band with prices fluctuating constantly. 
• It occurs due to low volatility and equal demand and supply in the market. As a result, there is a neutral risk. 
• The indicators used to predict sideways are the Relative Strength Index (RSI), Stochastic Momentum, Average Directional Index (ADI), and Bollinger Bands. 
• The major historical sideways trend occurred between 1966 to 1982. The traders noticed three cylindrical sideways moves in the U.S. stock market. 

A sideways market refers to a situation where the prices of stocks are moving between two ranges. Thus, it forms a horizontal band moving sideways. However, prices stay within the upper and lower limits. The price does not cross this range due to market volatility either. As a result, there is equal demand and supply within this zone. 

The sideways market involves horizontal planes where the forces of demand and supply are closely equal during a particular period. This trend usually occurs during the consolidation phase. In consolidation, the prices fluctuate between two price ranges. However, the duration of this market depends on the market sentiments and volatility. This market barely stays in this range for a few weeks. So, if it crosses or breaks any range, an upward or downward trend is noticed in the market. 

Understanding the support and resistance level is also important to identify a sideways market. The support is the lower price that bounces with its support. In contrast, resistance is the upper price that resists its position and falls. So, the prices fluctuate between support and resistance levels creating a horizontal band. 

These markets result from accumulation by large trader groups like banks and institutions. Being bullish about a stock, they tend to take support and the price to a certain level. However, their intentions are hidden from the rest. They buy slowly over a long period to develop their bullish position. As a result, the prices rise and reach a level where supply is more. At this point, the prices will stop rising and take resistance. The large traders will gradually sell their stocks in small amounts. As a result, there is no major impact on prices. Also, the prices bounce back and forth with the upper and lower ranges. 

The history or origin of the sideways market dates back to the late 20th century. A few sideways market trends were noticed in the United States between 1966 and 1982. However, they had some of the same features. So, let us look at the characteristics of this market:

• During a sideways trend, the average economic growth and the stock valuation (Price to Earnings ratio) are high. 
• There are lesser gains and narrow margins.
• The sideways market operates within its support and resistance levels. 
• When the sideways trend ends, the bull market follows up. 
• It mostly occurs in a consolidation phase. 
• The higher the stock valuations initially, the longer the market duration. 
• To avoid fake sideways predictions, watch for absolute valuation. 

Let us look at the indicators that help to identify sideways market trends:

• Relative Strength Index (RSI): Relative Strength Index or RSI is an indicator used in technical analysis that helps understand the overbought and oversold levels. Typically, it ranges from 0 to 100. However, if it oscillates between 40 to 60, it indicates a sideways market. 
• Stochastics Indicator: Even stochastics is a similar indicator to RSI that helps in trading sideways markets. It ranges between 0 to 100. Traders can use it to understand the sideways trend for 14 days. In addition, it has two signal lines that indicate its momentum. So, if it ranges between 50 to 70, it signals a sideways trend. 
• Average Directional Indicator (ADX): ADX is a technical indicator that measures the strength of a trend in the market but does not indicate the direction of the trend. It consists of three lines: the ADX line, the +DI line, and the -DI line.
• Bollinger Bands: Bollinger Bands are also important for identifying a sideways market. The bands will move sideways with low momentum if there is low volatility. 

Let us look at how to start trading sideways market strategies to understand the concept better:

• Identifying the Sideways Trends: Although following traditional strategies for such a trend is difficult, adopting specialized sideways market strategies is better. However, the first step is identifying the trend using the above indicators. As a result, the traders can depict the momentum and volume of trades. So, if the volume of both bullish and bear traders is equal, it results in a sideways trend. In addition, identifying the market volatility also becomes important. Likewise, taking positions considering the sentiments can bring some good profits. 
• Avoid Paying More to Gain Extra Returns Tomorrow: The sideways market always involves P/E contractions. In simple terms, traders often look at the declining valuation and pile up stocks. However, it can mislead investors. Therefore, looking for balance sheet health for good returns is necessary. 

Let us look at the below chart of the American footwear company, Caleres INC., which depicts a sideways market trend from July 2021 to November 2022:

In the above candlestick chart, the stock is currently in a sideways or consolidation phase. The support level is around $22, and the strong resistance zone is $32. So, a new trend will follow if the stock breaks either of the levels (support or resistance).  

This has been a guide to what is Sideways Market & its meaning. We explain its indicators, trading strategies, chart, and characteristics. You can learn more about accounting from the following articles –

• Volume Weighted Average Price
• Momentum Indicator
• Swing Trading