Kane Trading - Education for Serious Traders

					May 5, 2004 Commentary (mid-week edition)- For today I am going to review the status of some recent plays, and then I'll point out one interesting thing that relates to a past play. Let's start out with the Oil index, the XOI. I'll show a daily chart first, and then comment. The XOI went on today to set yet another all-time high. This chart is similar to one that I presented just a little while back, except it's setting the new high. The ABCD I played off of is highlighted on the chart, as well as the previous all-time high (the horizontal line). There was some serious shaking around that horizontal line, but now that's all cleared and it's just blue sky. This reminds me of the late 90's. Nothing but sky. And how about crude oil, as the index sets new records? Let's look at a 60-minute chart of the June contract. I've highlighted the ABCD pattern that first got me watching this contract, and the index. The arrow points to a smaller ABCD pattern that could have been used as an add-on spot, or an area to watch for a direction change. Here, again, we have new contract highs, and nothing but blue sky. Take a look at unleaded gasoline, too. I am keeping a very, very close eye on how this reacts if 40 is hit. There may be an enormous pile of sell orders just over that price. If this thing blasts through 40 and there is little or no reaction, that tells me something for my current management. As an aside, there is quite a divergence right now between drillers and refiners. The drillers are getting beat down, and the refiners are rocketing. Pull up some charts and take a look. Let's take a look, now, at the Gold and Silver index. I'll show the daily chart. I may have had an error on the weekly chart with the price projection lines. I think I managed to get them right on this daily chart. I am seeing a reaction in the area I expected a reaction. This is not anywhere near enough to trigger me into a long trade. I would only consider a play in this 'sector' if I get a solid reversal and large confirmation entry trigger. It looks extremely ominous, and although that can lead to some of the best trades in my opinion, I'm willing to 'pay up' to attempt to increase my likelihood of success here. I'm very interested and I'm watching closely, but I'm very leery of this one (and today's price bar didn't help). Let me finish with an interesting issue, live cattle. Recall I made a play off a 5-point pattern awhile back on this one, and it played out extremely well for me. That was on the April contract. The pattern looks a little different on the June contract, but let me highlight that, and show where we are now. I'll use the daily timeframe. The completion point was not quite so 'deep' on the April contract, as that unfolded. It reversed almost exactly at the .886 retracement. The first arrow shows the move I played. Many, many traders were playing this, and many jumped out at their 'profit targets' in the area it reversed. I pointed out in this column how I was going to wait to scale out, 'on the way up'. Readers familiar with this column know that I don't care much for 'profit targets', and rarely, if ever, use them. I let the market tell me when the move is over. In the last play, the 'profit target' traders did better than I did. That makes zero difference to me, or my 'Trading Plan'. I scaled out quite rapidly and was completely out right after the reversal. I gave back a little to be sure the move was over. Overall, it was an excellent play for me. Here's my point. Sometimes, on certain plays, a 'profit target' would make me more money. But it also cuts out 100% of the home runs. It makes no sense to me to cap the return when I have no idea if the run is even remotely close to being over. In the long run 'profit targets' have hurt me. If they didn't, I would use them. All I can do here is tell you why they don't work for me. You have to decide for yourself if they work for you. They just aren't a part of the Kane Trading methodology. Let me finish this discussion by going into a bit more detail with this current chart. Many traders, myself included, suspected the reversal area was a potentially good place for a long trade. As I scaled out I started thinking long. It was a tough, but doable, trade, as far as entry, for a trader who was short going into the area, and who wanted to scale out i.e. me. The LC ran over 7 points straight up from that area. 'Profit target' traders were likely taking their trades off all the way up. I go out 'on the way down' with scale outs. Then the LC did something interesting. It formed a variation of a 4-Point Continuation Pattern. I highlighted this with the second arrow. As soon as my scaling out was over, I started to get alerted to another long trade opportunity. Looking down on a 15-minute chart, this one had one of the best 4-Point entries I have encountered. Entry was around $76.35 (see A Pattern Trade Entry Technique for my entry method on this one), and no hint of a start to scaling out yet, up about 10 points. The details of how I manage trades like this are outlined in Trailing Stops. This time, I'm willing to bet I will do a lot better using my normal methodology than if I used 'profit targets'. I think that if I had 'profit targets' I'd be long gone by now. Sitting and watching, wondering why I was out. Now, does this issue show a ton of classic reversal/exhaustion signs right here? Absolutely. Look at that last bar, look at the volume, look at the next to last bar. It's done right here. No more going up for the LC. But yet I wouldn't even think of closing out on this last bar. I let my management play out. I've seen many, many setups that look like pure exhaustion blast off to new highs. I can't call the end to this run up in blue-sky territory. I have to let the market tell me when. To do that, I have to give some back. But if I weren't willing do that I'd be out already. For me, my trading works way better, net overall, when I don't use 'profit targets', and simply let the market tell me when. The next commentary will be the weekend edition, posted Sunday.


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