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 March 31, 2004 Commentary
(midweek edition)-
Today I'm going to show what I was
looking at in the SOX index. I was hoping that the readers would take a shot at
setting this one up, and then we could see if we got the same thing. I'll start
with a weekly chart, showing the overall view of the index.
The SOX has made a pullback that is somewhat
similar to the first pullback that the SOX made after the major reversal back
in October '02. In Elliot wave terms, this may be a wave 4 correction. I know
what you Elliot wave specialists are saying: by the principal of alternation,
this should be a complex correction of some sort. It shouldn't set up as a
simple ABCD pattern.
I can't really say that I follow that principal all that
closely, since I have seen far too many exceptions. What I know is that if an
ABCD pattern sets up that meets my other criteria, I'm not going to pass on a
trade because of this principal. Let's look at how this correction looks on the
daily chart.
This was a clear ABCD pattern that set up.
This pattern was setting up not only in the SOX, but also in many, many other
issues. I put a grouping on the chart, and it contained a very large quantity
of numbers, all hitting very closely together. This told me that the SOX was
displaying a high degree of 'harmonicity'. Let's look at my
grouping.
Some of the numbers I used went right back to
the major reversal point. The overlap was tremendous. I also noticed something
interesting when I made a comparison of the size of this pullback to the size
of the 'wave 2' pullback that completed back in early '03. I'll remove the
grouping from the chart temporarily, and just put a single price projection on
the chart, to help compare these two pullbacks.
The grouping area was right at a spot where
this pullback would be .786 times the size of that 'wave 2' pullback from early
'03. This was yet another number falling in the same area. If I received an
entry trigger in here I wanted to make some plays. But I saw one more thing,
too. I'll add the grouping back onto the chart, as well as this new projection,
and I'll also add on two sets of median lines.
When I originally did the median line
calculations on another program, I got the larger set median line to hit right
exactly at the intersection of the grouping, price and other median line. The
calculation came out a little different with the program I used for this chart
and I haven't yet figured out why. The thing that really caught my eye was how
close all the factors came to this one spot.
The other important thing here is
that this entire setup is guiding me in making decisions on the likelihood that
this is the end of the 'correction'. One upper median line has been breached. A
second upper median line is waiting above. I have the BC leg of this ABCD here
to point me to an area where a move up would equal the last move up. I have a
lot of significant points to watch where I can observe the behavior of the SOX.
This behavior will help guide my trading.
I'd also like to point out that on
a more micro level it seems that the INDU and the S&P are outperforming the
techs right now. This is definitely a concern when trading the semis and other
techs. It's common for the semis to lead. When they don't, I am on the
alert.
Before we close, I want to update the cattle trade. This one
continued to rise, and as I mentioned, I scaled out on the way up. I received
an e-mail asking if I wouldn't have been better off just closing that one when
it started trading sideways in an area where a big pop was growing more likely.
The answer is that in this one case yes, but not overall, in the long run. If I
felt that making judgment calls and closing the plays in such cases was more
profitable over the entire series of my trades, I would surely change my plan
and trade that way.
I can't look at the few exceptions when it would have
been better to do this or that. I have to look at what works the best for me in
the sum total of all the trades. If this one had continued down I would be
riding that and those that grabbed their profit would be wishing they had held
on. Again, that would be a case of looking at one trade and making an
evaluation. The important thing for me is doing what I think gives me the best
results in the long run. Think this over the next time that you assess and
evaluate your 'Trading Plan'.
The next commentary will be the weekend
edition, posted on Sunday.
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