Kane Trading - Education for Serious Traders

					May 2, 2004 Commentary (weekend edition)- This weekend I am going to show some things that I am looking at in the major indices. I can't say for sure what is going to happen from here, and if you think that is necessary for being a successful trader, please re-read my free article The Myth of 'Predicting' the Market. What I am constantly searching for are 'areas of interest' where I think something may happen. Then I further filter my search for potential trades around those areas that have a favorable reward/risk profile and probability of playing out favorably. Of course it is essential that I see certain types of expected behaviors in the areas of interest, only one of which is an entry trigger/signal. Let's start with a look at the cash S&P index on a weekly chart. The S&P might be setting up as an ABCD correction to this huge uptrend. I emphasized 'might' because I have no idea what the S&P is going to do. That's in the future, and I can't predict the future, nor, I believe, can anyone else. What I'm setting up are areas that I want to watch closely for potential setups. This is one of those areas. I'm setting up multiple groupings based on the alternate ABCD's as I presented them in Kane Trading on: Trading ABCD Patterns. I just show the 1.000 price projection here so that the reader can see where a 'standard' ABCD completes, to get a feel for what we are looking at. It's important that you do your own work on building groupings. If you do, you will notice something interesting here. I will explain what that is after we get to the NDX in a minute. Let's move on to the daily chart, where I'm also looking at something there. The daily chart is setting up a nice 5-point pattern, set up to continue the uptrend. This is the type of alignment that I like to see when I trade a 5-point pattern. It has the proper 'context', as I detail in the new book Kane Trading on: Multiple Timeframes and 'Context'. (Which, by the way, is selling quite well. Thanks to everyone who has purchased this.) This pattern would 'preempt' the ABCD pattern, as it completes before the B point is violated. It is set up to 'test' the B point. Before we move on with the discussion, I want to ask what is it that made me focus on the .886 area for the pattern completion? No, it's not that my .886 is my favorite retracement and that I lean that way regardless. I don't just set up groupings around the .886 because I discovered it. I do it for technical reasons. Recall I mentioned how Scott Carney and I had both concluded, after extensive discussions and chart studies, that the B point holds a lot of information that most people ignore or are unaware of? Well, look at the B point retracement. That tells me to focus on the .886 area. Sure, it may complete before that, but I find my best trades occur when the .886 is the completion point with this type of a B point retracement. There is a wealth of information of this sort in Scott's new book, which you can buy on this website in a package with my latest book. So anyways, do I see a problem with the two setups? The problem is simply: I don't like either setup. Before I discuss why, let's look at how the NDX looks. The weekly NDX also has a nice looking potential ABCD pattern setting up, set up to continue the big uptrend. The pattern looks a bit better to my eye than the S&P pattern, perhaps because the C point retracement isn't so 'deep'. As you all must know by now, at least the readers of my books know this, I don't like C points much past the .618, and the .786 is getting to be about it for me. I'm not saying that C points even up to the .886 aren't valid, only that I find I don't have as good a success ratio playing patterns that have them 'deep'. Let's move on to the daily chart. The NDX also is setting up with a 5-point pattern, set up to continue the uptrend. This pattern, like the S&P 5-point pattern, is set up to 'preempt' the ABCD pattern. Notice I also set this pattern up to focus on the .886 retracement area. Look at the B point retracement. Now you know why I am looking where I am. Of course an entire grouping would be built before I even begin to evaluate the trade potential. And that leads me to the gist of this discussion, and why I don't really like any of these setups very much. The first thing is that the numbers aren't grouping at all for the ABCD's. This is how I determine 'harmonicity', and it just isn't there for these indices with these ABCD patterns. This is a big red flag. Next, the corrections would be very shallow with respect to the overall uptrend. Unless the underlying movement was extremely bullish and had a lot left to go (which I don't think the 'fundamentals' support), I would expect a deeper correction. This has me wondering if all this is not an AB leg of a much larger correction. If so, we could be starting a wave 3 of this AB leg. I don't use Elliot wave in a strict sense at all, but I do frame things out in Elliot terms most of the time, if nothing more than to look at the possibilities. Given all this, the daily patterns would imply that the March lows that are already in place are the full corrections, since these patterns are set up to 'test' those lows. If I am concerned that the larger ABCD patterns may not be enough of a correction, then surely the 'AB legs' alone aren't enough. Hence, the most I would be looking for is a 'tradable bounce' off the daily patterns. For now the trend is clearly down, and I am playing as though we are in either a CD leg down or a wave 3 down of an AB leg. My emphasis is on the short side until the charts show me we are in an uptrend. Keep in mind, though, to my eye, the uptrend from the 'bear market low' is still in place. We are countertrend to that, for sure, at this point. Now I simply watch how the indices behave at the areas I set up, and that will guide me as to how I want to play. As an aside, I stumbled upon yet another clone site for Fibonaccis (I won't mention any names, but an internet search would surely find it for you in seconds). This one was particularly amusing because it was based around the .886 retracement. I was very flattered, since many words like 'magical' were being used to describe the ratio. The software was based around this retracement. Yet nowhere on the entire website was I quoted or credited in any way. He loves the retracement, built software around it, and has no clue whatsoever who even came up with it, or why. I did notice that some changes have occurred on some of the wording on this site just recently, so I suspect that worries about potential copyright infringement, or something of that nature, may have come up. As I have mentioned in previous commentary, Scott Carney did an excellent job detailing the history of this retracement in his new book, and on the eSignal article that he did. For me, I'll just keep on inventing new things that I put out at Kane Trading (and things that I put out in conjunction with Scott), and let entire swarms of people rip them off and not credit me. Imitation is the sincerest form of flattery. My readers will always know where they saw it first, and who is really the leader in the field. The next commentary will be the mid-week edition, posted on Wednesday.


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