Kane Trading - Education for Serious Traders

					January 26, 2004 Commentary- Another incredible day in the market! It's a lot like living in Arizona. In Arizona we have just one kind of weather: sunny. Every day is a sunny day here. And the market is just another day, another new contract high. Pretty much every day. If you tell someone in Arizona that you heard it's going to be sunny tomorrow, they'll look at you very strangely (and perhaps lock you up). I feel the same way about saying 'another contract high again today for…' This thing just won't go down. It's incredibly top-heavy, and yet it keeps going up. Today I'm going to look at a trade that I am doing in PDLI. PDLI formed a great looking pattern with two very tight, very close groupings. It looked like an awesome potential trade. Let's look at the daily chart with the groupings, and with the pattern highlighted. I didn't like this setup the second that I saw it. Don't get me wrong; it's a great looking setup, a real beauty. But I just didn't see PDLI going down in here. This is what I mean by 'context'. I don't to trade patterns without looking at how the pattern fits in the larger scope of things, what the general market is doing, the sector, etc. First, I looked at the biotech index. It seems to be forming a possible pattern trade, but that's up higher. Not only that, but it has a second, smaller pattern that completes at just about the same exact spot. Strike one. Next, this market is just so strong. Or should I say it grinds upwards so efficiently. I'm not looking to take too many short trades right now off of big patterns. This play calls for a fairly major top in PDLI. I just don't see that right now. It may happen, but the odds aren't favorable enough for me. Strike two. Finally, PDLI itself just looks strong. Too strong for me too try to pick an end to this run. I don't like patterns that call significant tops or bottoms, and this one sure would be. Strike three. So what's my plan? Let's first see what PDLI did shortly after completing the pattern and hitting the groupings. So far, so good. It sure looks like I may have made a mistake in not taking the pattern trade. It may be that the pattern trade will work out great from here. But it was no mistake. What I did was completely consistent with my 'Trading Plan'. I didn't like the layout, so I came up with an alternate plan. It won't always play out in my favor. That's trading. Sometimes I miss them. Let's see what PDLI did shortly after this, and then I'll explain what I am doing. PDLI started down, and then reversed right back up and through the groupings, going higher than the highest trade at the pattern completion point. This does not mean that it can't or won't fall right back down through and drop like a rock. It could. But I'm not reading this current action as bearish behavior. My plan was to wait and see if the pattern/grouping failed. I want a very specific type of failure. This type of failure is one of my favorite ways to trade. I wanted to see PDLI come off the pattern/groupings like it was going to work out perfectly. I then wanted to see it move down for a little while. Then I wanted to see a strong reversal up and through the groupings. I got all this. This is a classic failed pattern trade for me at this point. My next step was to drop down a full two timeframes and hope that I got a pullback to get in on. I don't like to chase trades like this as they 'break out'. That's a sure fire way to 'take the pipe'. I went to a 15-minute chart and waited. Let's see what that looked like. The horizontal line is the high price for the pattern completion. The first arrow shows the area where the high is taken out, and I get ready. The second arrow shows the area where I decided to take the trade. I took some heat after that, but not enough to stop me out. I plan to keep a fairly tight stop on this. If it didn't take off fairly quickly, I was planning on dumping it. I am playing this two ways. I'm playing an option for a longer-term move, and the stock for a shorter-term play, where I'm planning on aggressively taking profits. I'm not planning on giving very much back on the stock play . We'll see how this works out. Given the small pop that I got after entry, my stop is already moving up. I'm keeping a tight leash on this one. I'll do some follow up on this, regardless of how it plays out. Take a look at FISV, as I am looking at this in a similar manner. I'm still sitting tight on FDX and VTSS right now.


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