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 February 25, 2004 Commentary
(mid-week edition)-
Well, I have to admit that I sure
miss writing the commentary every day. But, on the other hand, I'm really
getting busy on the books, and I think I made the best decision.
Today I'm
going to point out a potential trade that I'm looking at. I chose to show this
one (of the many that I'm watching) because it is in keeping with the context
theme. I've been watching AMZN on a daily chart for a while. Let's take a look
at the chart, as it nears the potential trade area.
AMZN is forming an ABCD pattern, set up to
correct, and hence continue, the trend. As soon as I see a potential ABCD
pattern setting up like this, I put a grouping (or groupings, if the numbers
fall that way) on the chart. I'll highlight the pattern, and show the grouping
that I'm focusing on.
Once at this point, I now have to make a
decision if I think this is a viable potential trade for my 'Trading Plan'. I
have to examine the higher timeframe(s) and look at the context. Let's move up
to a weekly chart and see what that looks like.
The first thing I notice is that AMZN has
been in a very strong uptrend. This is fine, because as I outlined in Kane Trading on: Advanced Fibonacci
Trading Concepts, I like playing certain types of pullbacks/corrections
in solid trends. So far, this correction is set up for a trade in the direction
of the trend on my traded timeframe (the daily), which is what I am looking
for.
I also like the 'proportion' of the correction, from a time
perspective, with respect to the uptrend. So far, so good. The next thing that
I need to check out, though, is if this recent high may be a potential reversal
point when I look at an even larger picture. I know AMZN has a lot more
history, and at a lot higher prices, so I know I need to see more data. Next,
I'll look at another weekly chart, but with a lot more data on the
chart.
When I look at this chart I don't see
anything in particular that says that the recent high is a likely reversal
point, at least from a pattern perspective. The only thing that bothers me is
how 'old' the trend is. When an issue has went up over 1000% I have to wonder
how much more it can go, from an odds standpoint.
AMZN looks a lot like the broader
market to me in here. So, I expect that the likelihood of this trade 'working
out' is directly related to what the 'market' does. What I take from the weekly
is that I don't see any red flags except the length of the run so far. The last
step is for me to examine the price action in this correction so far and see if
that shows me anything to help me evaluate this potential trade.
Let's go back
to the daily, and I'll highlight something that I was playing around with a
short time ago.
AMZN set up a nice 5-point bearish pattern a
little while back. The problem was, this pattern was set up to reverse this
long uptrend. Now, this is a trade I would absolutely love if the recent
high were set up as a reversal point on a higher timeframe. Then I would have a
'pattern trigger' entry for that larger pattern. But that wasn't the case. This
pattern had no context for me to take a trade there.
On the other
hand, though, there was a possible trade anyways, if I kept in mind what it was
I was trying to do. You see, for me the pattern is not a viable trade on the
traded timeframe, given the context from the weekly chart. But I was assessing
the overall picture as this set up, and thought that the first pullback was
probably not sufficient to be an entire correction. Once the 5-point pattern
set up, I began to suspect that it might be part of a larger ABCD pattern
correction to the uptrend.
This gave me a different context to consider for a
trade. This trade, though, would be decided on the premise that the maximum
likely run would be to the grouping area on the previous daily chart. If an
entry could be obtained where the reward/risk and probability of the trade
working out were adequate for my 'Trading Plan', this trade may be worth
taking, for a short-term trade. In my case, it did turn out to be worth
it.
One of the factors that I looked at was the character of the first
pullback, the XA leg of the 5-point pattern. It had a 5-wave type of structure,
and although there were slightly overlapping swings, it just didn't look
corrective enough in structure. It looked more like the first leg of an ABCD
than an entire correction. This increased the odds, in my opinion, that the
larger ABCD would form.
The near perfect ABCD to complete the 5-point pattern,
hence forming an ABCD in the BC leg of this larger potential ABCD, was enough
to push me over the edge for this trade. Now I get ready to scale out of the
rest of this trade if I get signals that the trend is reversing. I'm
getting ready to take the long trade if I get an entry trigger and the
broader market isn't tanking or showing signs of weakness. This market is not
looking good for longs right now, but that only has me cautious, as that's how
it generally looks right before it starts another strong leg up.
So, it should
be clear from all this that 'context' is not 'cut and dried'. It also can take
into account what move the trade is trying to capture. Different trades, based
on different moves, even if set up in the same area, may be acceptable or
unacceptable, given the context. This is the type of thing that I will attempt
to cover in great detail in the new book. The next commentary will be the
weekend edition, which I will post on Sunday.
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