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 December 15, 2003
Commentary-
Well, now, that was something, wasn't it?
Although I fully expected the suckers to get beat up on the open, I expected
that the selling would stop at the .618 area from Friday's close to the high on
the open today. It didn't. Let's look at a 3-minute chart of the March ES
contract, showing the area that I watch.
This .618 calculation is kind of a little
secret I use on huge gap days where I expect the move will continue in the gap
direction at some point. In my experience, most of the time the .618 area is
where a resumption of the trend occurs, if it is going to occur. I find that
sometimes the .618 is slightly exceeded, but it defines the area I want to
watch.
When the ES slightly exceeded this .618 area, bounced, and then
broke the low of the day I was all over downtrend continuation triggers. Notice
how the .618 was tested from beneath? When I see this I am intensely focused on
downside continuation. I didn't expect this much continuation, but I don't
trade what I expect, I trade what the chart shows me.
Now, was
there anything to tip me that the open might be an area where a reversal, even
if a temporary one, might occur? Let's look at a daily chart with two external
retracements on it.
There was a tight area formed by a 1.618
external retracement of the last pullback and thrust, and one of my favorites,
a 1.902 from two swings back. The high was almost exactly at the 1.902. Note
that the high from this daily includes the overnight action, which was a little
higher than the opening price.
Let's look at a 60-minute chart, with another
external retracement on it, and how the ES reacted.
The ES failed right at the 1.618 external retracement.
The reason I didn't form any groupings at this high point is because of
something that I make very clear in Kane Trading on: Advanced Fibonacci
Trading Concepts. I don't use the techniques to pick the end of trends
on my traded timeframe.
I may form some groupings to help aid me in management
on an existing trade, but I was not about to try to call the top on this. I
chose to show a few key retracements here to point out where I was looking for
a possible short-term reversal. If I put any groupings up some readers may
misconstrue how I use them. The main use for me is if I had been in a trade, I
would have tightened up some of my trailing stops in this area.
So, what does
this mean for tomorrow? As I've said so many times before, I don't try to
predict the market; I just look for patterns, form groupings, and try to find
areas where I feel the reward/risk ratio is to my advantage. Given the voracity
of the selling, I'm going to let this play out a little bit before I look for
any new trades on the larger timeframes. This had the look of the start of a
mid-sized correction to the uptrend, but that's just a guess. I'll see how it
behaves tomorrow, and then get some groupings together.
I'll finish
with the most exciting thing for me from today. AMLN finally penetrated the
groupings! Let's look at the chart.
Now I switch down to a lower timeframe, and use one of my entry
techniques from Kane Trading on:
Entry Techniques. I want to point something out here. If you were a
fade the entry trader you might be in this trade right now. Given the change in
market character today, I don't want to be in this trade yet.
I want a signal that the groupings are being respected and the tide
has turned. Please refer to my free article The Critical Elements of a Trade
for a bit more detail on this. If I planned to just fade the entry, there would
be no point to putting a second grouping on the chart, as I would always enter
on the first grouping. I want to watch the behavior here. I want to filter out
trades that show no signs of reversing.
I also have
decided to 'up' my required level of entry trigger confirmation for this trade,
due to the market action today. If this is the start of a larger scope
correction, I don't want to enter a long trade against the market flow. I want
a solid signal to trigger me into this, with plenty of confirmation. Those
readers who have gone through Entry Techniques know how I characterize
the different levels of confirmation that the different techniques provide.
Here is a great example of why I have various techniques to choose from.
Keep your wits about you tomorrow, in case this thing gets wild.
I'll have more to say on the larger timeframe picture in tomorrow's
commentary.
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