Kane Trading - Education for Serious Traders

					January 6, 2004 Commentary- Today was a very crazy day in the market. In spite of the choppy, sloppy program driven action, the ES and NQ both set new contract highs, again. The action was tradable, but only barely. If you had a lot of patience and picked your spots, it was possible to play. The smartest move was probably sitting this one out, though. I'm a trading junkie, so I did the grind, but I was working very, very hard. Let's look at something completely different than the ES today. I spotted this pattern setting up in the CRB index. As you likely know, the commodities have been on a real tear lately. I'll start with the weekly chart, without any highlights. Can you see what I am looking at? Let me add the pattern structure in, with a grouping. That's a very nice structure, with a highly varied assortment of numbers in the grouping. It's interesting that there are two 3.14 (pi) external retracements in the grouping. These usually show up when rather extreme moves are happening, and it's clear the CRB is in 'extreme' mode. I also threw on the B and C point retracements, to show how harmonic this index is. Do I think that this is the end of the run? I just don't know. If it is, it has significant implications for the economy. As you've all heard me say many, many times, I don't like to use the patterns to call a reversal of a significant trend. I've had a few people e-mail me, asking for more detail on what I mean by that. I cover this in Kane Trading on: Advanced Fibonacci Trading Concepts in great detail, but I'll add in some more detail right here. I've heard a few people say that it seems that many of the bearish patterns are getting blown out now, and not 'working'. Following my methodology, one would only consider a bearish pattern that is in the context of a larger scale uptrend i.e. the pattern is set up to reverse a correction to the uptrend, not reverse the significant uptrend. We have been in a major market uptrend for about ten months now. I'm not going to play a pattern that calls the top of that trend using just the data from the uptrend. I may try to call the top in the context of the weekly chart, if the weekly forms a large pattern. But if the pattern that calls the top is only from the data in the uptrend, to me that's low percentage. I look for corrections to the trend that set up as bullish patterns, reversing the correction to that uptrend. I cover this in great detail in Kane Trading on: Trading ABCD Patterns. This is a concept that I rarely, if ever, see anyone else discussing. You must have context. A pattern that calls the end of a trend, either an uptrend or downtrend, and uses only the data from that trend is a long-term exercise in futility, in my opinion. Now, why bring this up now? We just looked at such a chart in the CRB. What's the context? Are we using a pattern to call a major top? Let's look at the weekly chart again, with a lot more data on the chart. The pattern that I highlighted is in the top right corner of the chart. But look at that run up. We have a huge run, breaking out over multi-year highs. This thing is a monster. I am not about to use that little pattern up there to call an end to this monster run. A pattern is only as good as the context that it is in. In a way it's almost like an entry trigger without a potential trade area. You can get entry triggers every two minutes all over the place, but if it's not an entry trigger for an area you feel that something might happen, it's useless. And to me, a pattern that isn't set up in the context that you want to trade in is just as useless. I like to go with the flow, not swim against the tide. But Jim, I hear, these are reversal patterns. Yes, and what happens when a counter-trend correction to a major trend comes to an end, and the major trend reasserts itself? You got it, the counter-trend reverses. That counter-trend may have been a nice ABCD pattern, or part of a 5-point pattern, or whatever. Now you have a pattern reversal, just like you want, and you have context, just like I'm always saying. It's not that difficult of a concept, but it's one that most seem to overlook. I'm not sure why that is. So what does all this mean to this example? I'm trying to point out the idea of being selective with the trades that you might choose. Maybe you do want to try to call the top here. If that's what you want to do, then do it. But do it knowing what the context is. Factor that into your plan. Or do what I do. Look at the trade for a failure. Let me show one more very interesting thing with this CRB pattern. Take a look at this major external retracement, and where it landed. That's a huge retracement to consider. If this thing keeps going up, beyond the pattern and this 1.618, that's got my attention. I'm going to be watching this thing very closely. The market is getting very wild up here at these new highs for the moves. The first week of January new money will be spent soon, and we'll see what happens then. We're way overdue for a good-sized correction, but we have been for a long, long time. It's coming, and it may start just a bit up from here, but until it does, I'm focusing on the long side.


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