Ask Mike:
What do the zones
November 20, 2006
Question:
Hello Mike,
What is the significance of the 4 zones in the technical charts? I see they encompass the 3 year highs and lows, but why 4 zones? Is there any resistance/breakthrough concept tied to crossing a zone?
Patrick M from Madison, WI
Mike's Response:
Hi Patrick,
The zones are calculated to be 1/4th of the difference between the highest high and the lowest low for the past 3 years.
The significance of the zones is as follows:
- A stock in Zone 1 is considered strongly at risk of going lower and should be avoided. However, a stock moving out of Zone 1 into Zone 2 is considered very bullish.
- We never short a stock in the lower half of Zone 1, since it is approaching its lower resistance level. A stock in the lower half of Zone 1 is avoided for both shorting and buying.
- A stock in the upper half of Zone 4 is considered to be a higher risk, but much stronger candidate to go higher. We like to buy stocks in the upper half of Zone 4 if they are giving a buy signal.
- Stocks in the bottom half of Zone 4 that have given a sell signal become great short candidates. They have a lot of room to go lower and are no longer testing new higher highs.
- A stock in Zone 2 that is giving a buy signal is considered a weaker opportunity than one in Zone 3 or Zone 4 giving a buy signal. The basic premise of this is winners tend to win and losers tend to lose.
- A stock in Zone 3 that is giving a buy signal is considered very strong as it has moved well off its lows and yet has a lot of room to move up before encountering an upper resistance level at the top of Zone 4.
There are nuances of each of these Zone crossing events. We look at recent tops and bottoms (double tops and double bottoms, in particular) to see if interim resistance levels have been established. We look for narrow trading ranges within these Zones to see if a cyclical pattern has developed which can give credence to buying on a break-out to the upside and short selling on a break-out to the downside.
A stock that is moving into one Zone from another Zone tends to be a very bullish move when moving up into a Zone and very bearish when moving down into a Zone.
Regards,
Mike |
