Kane Trading - Education for Serious Traders

					March 24, 2004 Commentary (mid-week edition)- Today I'm going to take a look at some short-term play ideas in the ES. First, I'd like to have a quick look at the cattle trade that we've been following. This play is really doing well. This is at, or past, the area where most traders would have taken the trade off. The 'odds' favor the LC bouncing strongly some time real soon, or so it would seem. Those that follow me know that I prefer to take short trades off on the way up as opposed to using profit targets. I want to let the LC tell me when it's over. I wrote extensively on how I do this in Kane Trading on: Trailing Stops. Let's look at the 15-minute chart and see what has happened since the last time we looked at this one. I'll leave that small bullish ABCD on the chart that concerned me shortly after the play began, for reference. Every time the LC pauses and looks like it is going to bounce, it rolls over again and drops further. At some point this will change, but for now the trend is down, and the play is short. I've got my management plan in place, and now I let this one play out. If the LC starts up from here and takes me out, that's fine. I want to give it the chance to keep dropping if that's in the cards. If I 'take my profit' because this seems like a good spot to do so and the LC keeps trending, I'm not 'letting my winner run'. I don't feel that I can have a net profitable 'Trading Plan' if I don't let my winners run. Let's move on to the ES. I haven't discussed anything short-term in the ES for a while, since I tend to overdo it in that regard and I was purposefully trying to stay away. One of the things that I noticed quite awhile ago is that the ES tends to roll sideways for periods of time, often two to four days, and then makes a strong trend move. It then rolls in a range again, sometimes with a slight up or down bias, and then 'breaks out' and trends strongly for a short time. Notice I said 'rolls', as opposed to 'chops'. Sometimes it chops, but sometimes it just rolls very smoothly. Let's take a look at the action for the last three days on a 15-minute chart. The ES came off of one of its trends and started to roll sideways very smoothly. It's hard to know when this will happen with a given issue, unless, as in this case, you expect that this is likely to happen after a trend move on the 15-minute chart. Go back and look at the behavior of the ES and see how it usually acts. When I'm looking to short-term trade the ES (which is just about always), I decide if it's in one of these trends between ranges, or in a range. I threw a stochastic RSI indicator on the chart to point out the oscillating nature of the ranges. (The specific oscillating indicator is immaterial, as they almost all point out the same thing.) These ranges aren't always so 'smooth'. Many times they chop like crazy. But when the ES starts to act like this I want to try to use that for my trading. I also want to start to get ready for a trend move to start. Again, go back and look at the trends and the ranges. I feel that I can get a good idea, statistically, about what is likely to happen, and when. Now factor all this into my Fibonacci/pattern game plan, and I think I'm ahead of the game. As I've said many times before, just because I use Fibonacci and patterns heavily in my trading doesn't mean that I ignore everything else. I use whatever I think helps my trading. Let's look at an example of what I'm trying to do. Let's back the chart up a little bit, at the point where I was looking at a possible opportunity. The ES had just broken down to new lows. The cash S&P was setting a new four-month low. The stochastic RSI just 'double-dipped' (which was a big-time divergence, for those that like to watch such things). I also noted two other things. The industrials were just a sliver above 10,000. I didn't think that 10,000 would just go out at that point. In fact, I thought if it was approached or slightly breached, it would not trigger sell programs, it would trigger buy programs. This was not something I was willing to gamble on; it was something I was preparing for, so that if I got a setup and an entry trigger, I could act on it. Now, lets see what the 3-minute chart was showing me at that time. The ES formed a pretty decent ABCD pattern (which I highlighted) from the previous high of the range down to this new low. I put just two of the numbers that I had in my grouping on the chart, for clarity. These two numbers show the area that I was focused on. I had a pattern, I had the range concept, and I had my thought that they would buy the INDU as 10,000 approached. If I got a trigger right in here, that's all I could ask for. Let's take a look at another 3-minute ES chart, showing how this played out. The arrow highlights the approximate area where I got my entry trigger. I was using a combination of the 3-minute and 1-minute charts for my trigger, and I was even watching some tick charts. I was looking for the ES to behave in a very specific manner down here, and it did. My play was to buy the ES just as it was setting new four-month lows. I'm not saying I bought in here because it was setting new four-month lows. I'm saying that I bought in here regardless of it setting new four-month lows. The setup came together. The ABCD pattern had context for me. I got a primo entry signal coming right off the grouping. I combined Fibonacci, pattern, and range/oscillators to come up with my plan. Never get so one-pointed that you miss things that may help your trading. Sometimes it's too easy to make trading harder than it has to be. On another note, pull up a daily chart of the SOX index and see if you notice anything interesting. Think pattern, and put a grouping or two together and see what it looks like. If you are familiar with median lines, add some of those, too. Keep in mind that we are in a clear downtrend right now, but also keep what you see on the SOX chart in mind. The next commentary will be the weekend edition, which I will post on Sunday.


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