The Red Zone and Trade Management


As feared, the market failed today and repeated the bear dance we saw on Friday. If we look at the world around us, how could it have gone up? Should we really expect a rally? If you look at the macro picture, nothing has changed from last week. Here are some of the obvious issues weighing heavy on investors (note: unknowns are often worse than bad news):


    • Employment numbers sucked Friday no matter how you shake it.
    • Unknown – what will the fed’s final version of financial regulation look like? 
    • Europe – you know the story here. More countries popping up on the could-fail radar
    • Euro – under 1.20. The global markets are all watching the euro hoping we’ll see some stability – again, an unknown factor that could have major implications on the global recovery
    • Oil leak in the gulf – let the unknowns pile up – a disaster and emotional downer on all fronts. Besides the catastrophic environmental fallout, what will become of the gulf coast economy, legislation, the energy sector, etc.
    • Natural gas line explosion today – more downer news
    • China – unknown. Not doing a great job of convincing us that their growth with continue on a strong clip
    • Obama in Iran? Maybe. Think of all the unknowns that opens up for us.


Now, let’s look at the happy news…


Hmmm. Earnings reports haven’t been too bad this year. What else? That’s about it. Yes, I’m exaggerating a little her, but the point is simple – we’re all focused on the negative and until we’re not, the bears are in charge.


So, what’s the game plan?


Nothing has changed from my previous posts. However, I marked up the DOW chart below to give you an idea of what I’m watching for and how it will influence my trades.


Right now, we’re in the red zone. The red zone is the area of uncertainty. This is where I trade the least. It’s the dead zone. We have no sure way to know if the market will fall below the red zone or if it will recover and move up into yellow. While we hang out in the red zone, I’ll trade very little. It’s a good time to read, learn, run scans, etc. Sometimes the best way to trade is to make little origami figurines with your cash instead of investing in stocks.  If I do play in the red zone, I’ll buy a few short term scalps or stocks in strong momo sectors (gold).  I will not go less than 90% cash.


If we move down out of the red zone, we’re back in green zone. Why? Below 9800, I expect most of the bullish holdouts to give up and jump on the bearish bandwagon. The panic of a major fall should, ironically, cause a major sell-off. 8800 is not out of the question and there is a lot of short money to be made in this green zone.

What would a bullish move out of the red zone do for us? Well, unlike a move south, I believe there will still be some apprehension if we move to yellow without a lot of supporting news. Also, notice the congestion over the last month in the yellow zone. I’ll likely trade the yellow zone very much like the red, but with more positions. It is still a scalp environment with swings only in areas with news and technical support. Cash position over 80%.


The top green zone is the land of the bull. Only news will get us there and only a confident market will keep us there. However, if we do manage to get above SMA200 (that level is key), then I’m back to active trading with both swings and scalps. A confident market is a great place to swing.   


I hope this help give you a better idea of what I’m thinking during this nasty trading period. We’ll revisit it throughout the week.


Note: currently in one position – $GLD


See you in the Boom Factory



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