Kane Trading - Education for Serious Traders

					December 10, 2003 Commentary- What a day!! It seems that I always wind up back on my favorite 3-minute ES chart no matter how hard I try to mix it up. It's just so harmonic and tradable lately for me that I can't help it. Before we get to today's very exciting action, I'd like to address a question that I received from a reader today. The reader asked what criteria I use to decide if I would trade a smaller priced stock, like the VTSS example. Normally I follow a fairly standard protocol as far as avoiding small, illiquid lower priced stocks. But I feel that we are in a very unique era right now in that there are many very low priced stocks that were bubble stocks not too long ago. Many of these stocks still have quite a following, and trade a lot of volume. I have found many of these stocks to be very harmonic and very tradable. I looked up the average daily volume on VTSS and found it to be running about 4.8 million a day. That's a pretty fair amount of volume for me, and the liquidity I need for my measly 500 or 1,000 shares is surely there. I then looked up another one of my lower-priced favorites, SUNW. The average volume right now on SUNW is a whopping 56 million shares a day! Now that's some serious following. The liquidity is there for my trading. Next, I simply look at the chart and see if it's harmonic. I try some groupings and look for patterns. It's pretty easy to see how the issue behaves. That's pretty much all I look for with a stock that was once a high flyer. Let's move on to today's action. It was just great from bell to bell. What I wouldn't give for the market to be like this every day. I'll start with the 3-minute chart of the ES. I noticed the ES turning right at Fibonacci retracements and behaving very harmonically. I'll add two retracements onto the chart that tipped me off to a possible pattern trade setting up. Based on the overall structure (and something we'll soon see on the 60-minute chart) I decided to start light by trading against the area of the .618 retracement, playing for the completion of the potential pattern (and the completion of the potential pattern on the 60-minute chart). I'll highlight the structure of the pattern that I was looking for on the chart. I found an acceptable reward/risk setup for my 'Trading Plan', and entered on an entry trigger on the 1-minute chart. Now why was I looking to play for the completion of this pattern? Let's look at the 60-minute chart and a grouping I had put on that timeframe. There was a really nice setup developing on the 60-minute, and it overlapped almost exactly with the pattern from the 3-minute chart. I felt the chances were pretty good that this area would be a magnet. I started lightly and added more on a trend continuation trigger. Let's look at the 3-minute chart again, this time showing how the ES played out. I've added two arrows, pointing to the initial entry and the second entry. This couldn't have worked out any better for me. I also had a good idea about management, since I was looking for a potential reversal in this area of pattern completions. I scaled out of just about the entire trade once the area was reached. Then I started preparing to get long on an entry trigger. I chose a trigger that required a little bit more confirmation since that was quite a sell-off. I'll put an arrow on the chart showing the area where my trigger signaled me, as well as showing how the ES responded to this area. I'm also going to add one retracement onto the chart that fell right in my grouping. This is the external retracement for the XA leg of the pattern on the 3-minute chart. Take a look at this. Oh, if every day was only like this! Look at that 1.902 retracement and the point where the ES turned. I can't tell you how many times I've seen this. You are getting one of my best tools here for free. As I've mentioned before, the entire derivation of this number and how I use it is outlined in Kane Trading on: Advanced Fibonacci Trading Concepts. I'll finish with a look again at the AMLN play on a daily. This one is getting close. I sure hope it doesn't turn here with today's small late day bounce. Look at how strongly AMLN went up on that last rally. I was thinking that there is no way this will turn right around and set a new low for the move. And then six days in a row of new daily lows, and a new low for the move. I'm getting antsy to play this, but patience is important, and I'm going to wait for a little bit more downside into the groupings area before I look for an entry trigger. If it goes from here I'll be disappointed, but I can live with that.


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