Zoning Laws

After an exhausting topping pattern equities finally resolved to the downside last week. And as always it is magnitude and vehemence of the follow up bounce that determines what happens next. But it’s not as easy as waiting a session or two and then declaring a winner. Sometimes those bad boys are trying to fake us out. So when caught inside a sideways guessing week without the proximity of any significant technical context I often resort to zoning in order to structure my approach.

Clearly the volume hole near 1935 is the gateway for the bulls and it also demarks bearish from bullish potential. Anything beyond 1940 is still part of the obligatory bounce we have been expecting – remember the 25-day SMA sits right there to block the way (shown below). If the bulls advance above it then we are in the high bounce area, which does not completely kill the bearish case but puts it into serious peril. And obviously anything above 1965 shifts the odds back to the bulls.

On the downside we have the guessing zone in which we’re currently stuck. Being short here is actually not a bad spot to be in IF you grabbed your shorts near 1940 (i.e. yesterday). Otherwise there is nothing of interest down here until we drop below 1910 – if the bears manage to drop the tape this low we could easily see acceleration lower. However IF we do it’s still possible that the bulls stage a late f-u rally higher.

What to do? 1) you are already short since 1940ish – don’t do anything and put your stop to break even. 2) You can get short right now but only with 1/2R – then build your position as it drops lower each 1/2R increment – your stop would be above yesterday’s highs. 3) Going long near the lows is possible if we approach 1910 – if you are short already then I would simply hold them and monitor the situation. 4) Be long above 1940 with a stop below – this is not expected to be a long term campaign unless the bulls start ripping this higher.

I know – complicated but as Scott mentioned – this is going to be a shitty week on the equities front.

Here’s a wee bit more context – the SMA/NL  chart shows us a support trifecta sitting below. There’s a NLBL at 1923.5 – the 100-day SMA at 1911 and finally a NLSl below 1900. A breach below that one puts us solidly into bear territory.

Now on the long side I would not play the spoos – I would go with the NQ instead. Technically we are painting an RTV-L today and if we get that bounce (yellow and green in the zoning laws above) then this would be my instrument of choice.

On the short side however… well, more about that below the fold and a few more goodies for my intrepid subs:

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Honorable mention:

Gold – courtesy of Darth Mole. If you saw this one last night you may have played that break out higher. And that wasn’t the only one today: EUR/GBP, crude, soybeans, bonds – significant jump in volatility. If you haven’t signed up for Darth Mole yet – it’s FREE all through August. Have fun!

Cheers,