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Zones 1,2,3

The zone analysis is a way of discerning whether or not the S&P (our main gauge of current market sentiment and direction) is trading within the upper, middle or lower third of the current day’s range. Once at least 45 minutes of trade have ensued, take horizontal line drawing tools on your charting package and draw one line across the high of the day on the SPY or the S&P 500 (SPX). Next draw another line along the low of the day. Then finish by drawing two more lines equidistant from each other and from the first two lines drawn so that the days range is divided into three equal thirds. Label the upper third “zone 1″, the middle third “zone 2″, and the lower zone “zone 3″. The thinking here is that when the market is trading in zone 1, there is an increased chance that stocks will break higher and traders should favor longs if trading intraday. When the market is trading in zone 3, the chances increase of a move lower and shorts should be favored if trading intraday. When the market is trading in zone 2, there is essentially equal chance that the market can break in either direction and intraday trading should essentially be avoided. The longer the market stays in the this middle third over the course of the trading day, the “choppier” it is. Zone 2 is the area most mentioned by the moderator because through experience we have found that the most difficulty in predicting short term market direction comes when the market is just treading water in a range (also known as ‘backing and filling’ or ‘chopping’).