Look At What You Know
It's not hard to find stocks suitable for this trade. If you've followed a stock for years, you may have a pretty good sense of its pulse-how it moves and how it responds to the broad market. So check your existing portfolio, even your losing positions. You may find a potential winner.

Take preferred stock. Preferreds are interest rate- and credit-sensitive securities, and they have been as volatile as common stock during the financial crisis, creating unique opportunities as the market again recognizes their original purpose as income plays.

The London-based global bank, HSBC, for example, has a $50 preferred share, series Z, trading on the New York Stock Exchange. At par, it yielded 5.72%. The stock tumbled to $29 in spring 2009 because of a broad fear banks would not be able to pay their dividends. This decline produced a current yield of 9.86%. The stock has since steadily rallied, and over the past year it has been trading between $38 and $46. Between May and July of this year, the range narrowed even further, and it was trading between $39 and $44.

At the beginning of July, it broke below $40, dragged down by increasing doubts about the economic recovery. But HSBC survived the banking crisis in good shape, emerging as one of the strongest global banks. Its capital and liquidity are solid. And the current yield on its preferred shares was more than 7%-a dividend taxed at the low 15% rate.

But what made this particular preferred even more enticing is a feature that makes it almost as safe as a bond. Say the bank gets into so much trouble that it must suspend its common stock dividend and all of its other preferred dividends-something that didn't even happen to the Royal Bank of Scotland, the poster child of the banking crisis. When it eventually gets back on its feet, HSBC would have to pay back all missed dividends on the Z shares before it could pay one penny on the common share. And for a bank not to pay a dividend on its common shares is anathema to its core institutional investors.

When the HSBC preferred share fell under $40 in late June, it was yielding six times more than the top money markets, and all these characteristics gave it a remarkable safety net, which the market wasn't properly valuing. The stock quickly bounced off this near-term low after the company announced healthy second-quarter results and got a favorable review from the European Commission's bank stress test, climbing 15% in just six weeks, several points past its range-bound high.

Not Cherry Picking
Skeptics may think range-bound trading is based on cherry picking performance after the fact. But patterns provide us with information: rings in a tree trunk, cirrus clouds, an electrocardiogram. Stock charts are evidence of current market sentiment.

Reading trading patterns is not an exact science. It must be done within the context of a firm's health and broad market and economic conditions. When investors are dealing with solid, profitable companies in a free market, certain price movements can suggest near-term moves. But investors must move decisively.

Ron Sloan, fund manager of the $4.9 billion Invesco Charter Fund, says range-bound trading requires considerable discipline in tracking, buying and selling stocks. Though he's a buy-and-hold investor, he's starting to use this shorter-term strategy to trade around existing positions as a means of locking in modest profits when core holdings are not moving.

A key reason he has modified his thinking: Market cynicism is undermining some companies' share price performance despite their attractive fundamentals. Look at Intel over the past four quarters. It has consistently topped consensus earnings estimates, rising sequentially from $0.33 in the third quarter of 2009 to $0.51 in the second quarter of 2010. June's figures blew past those of the previous quarter by $0.09, or more than 20%. And yet, since mid-April, the shares have continued falling from their $24.37 peak. Not even the blowout second-quarter earnings figures could stop the decline, though they offered a small, temporary boost to the stock from $19 to $22. In August, the stock broke below $18.50.