The Death Zone

BarroMetrics Views: ‘The Death Zone

Baz asked: “When is a Death Zone not a Death Zone?”

To answer that question, I’ll identify the zone, explain the rational and assumptions, then answer Baz’s question. The blog must necessarily be a summary of the material in Nature of Trends that ran for most of a chapter.

The Death Zone occurs in a probable sideways market  at between the 33.3% and 50% or 66.7% and 50%. A probable sideways market is signaled when:

  1. There is a retracement of at least 78.6% of the prior impulse move and/or
  2. There has been a successful retest of one of the extremes.

Figure 1 shows the two conditions. ‘C’ must be at least 78.6% of AB to qualify as a successful test.

Figure 2 shows the S&P with 12-month swings (yearly trend, Green), 60-month swings (5 year trend, magenta), and the equivalent of 13-week swings (black). The chart shows that when their lines turned down at C, both the yearly and 5-yearly trends were probably in a sideways market.  The yearly trend confirmed a down trend with the line turn at D.

The normal Death Zone is the opposite end of the Value Area from the most current extreme. In Figure 2, this is the  zone 33.33% and 50%, 1304 to 1177.

To understand my rationale behind the Death Zone, you need to understand my view of the price action within a sideways market.

  1. In a sideways market, the market rotates from Primary Sell Zone to  Primary Buy Zone to Primary Sell Zone etc until a breakout occurs.
  2. In a sideways market, when the market accepts beyond one Value Area Extreme, we can reasonably expect it to continue to the other end. In Figure 2, with acceptance above 1051, we should see prices move the 50% and into the Death  Zone.
  3. Until the market accepts beyond one of the Value Area Extremes, we can expect the market to treat the Value Area as a mini-sideways zone.
  4. To confirm that the sideways ranges are intact, the breakout from the Value Area should be in the same direction as the original entry into the Value Area. In Figure 2, the market came from the Primary Buy Zone. Hence if the sideways structure is intact, eventually we should see a breakup above the top of Value (33.33%) and a move towards the Primary Sell Zone.
  5. Once the market accepts beyond one Value Area extreme, we should see a move beyond the opposite extreme before it accepts beyond the originating Value Area Extreme. Thus in Figure 2, once the market accepts above 1051 (66.67%), eventually we should see  a move to 1156 to 1461 (Primary Sell Zone) BEFORE we see re-acceptance below 1051.

Point (5) contains the answer to Baz’s question: A Death Zone is not a Death Zone when the market accepts beyond the Value Area Boundary. In Figure 2, the Death Zone is not a Death Zone if we accept above 1304 before we see re-acceptance below 1051.

fig-01-sw.jpg

FIGURE 1 Sideways Formation

fig-02-12m-sp.jpg

FIGURE 2 S&P Monthly

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NOT #2

3 thoughts on “The Death Zone”

  1. Hi Ray, Thanks Ray. Is there a way to pre-empt the probability of whether it will go thru the value area or not? stats? Profile? I guess what i am getting at is using a factor of a deviation as a stop loss or incorporating deviations with the rule of 3.Thanks for taking the time. cheers baz

  2. Hi Baz

    I have no mechanical way. As with most of my stuff, context plays an important role.

    In this case:

    1) The Negative Development Buy in March
    2) The fact that to date much of the quantitative easing is right back with the Fed Reservce. Until the addtional liquidity hits the economy, inflation will be tame. I see the threat of inflation as being the probable stimulus to start the downmove.
    3) The ability of the S&P to continue climbing in the face of sell setups….

    ….all suggest that the next down move will be a correction rather than a Death Zone start of a bear market.

    Of course we aren’t actually in the preferred retracement area for the Death Zone.

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