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 August
29, 2004 Commentary (weekend edition)-
Today I am
going to look at a potential setup in ZRAN. I chose this example not
because I think it is going to be a great potential trade, but because it shows
a lot of real world aspects of making decisions in pattern trading. It also
covers a lot of various aspects of what I am trying to teach.
Let me
reiterate, once again (I got that one from the department of redundancy
department), that part of trying to trade patterns and watch for setups is in
collecting a great deal of possibilities, and then waiting to see which come
together and present potential opportunities. The earlier in the setup that you
start to watch, the less likely it will actually develop into what you are
looking for.
If you wait until you see a pattern on the verge of completing
before you begin to follow along, the odds of it forming the pattern are much
higher than if you start watching when you see a B point forming, for example.
This is just common sense. That's why a lot of setups that I may point out
early don't go on to present potential opportunities.
I try to show
them early to increase the educational value. It's important to understand that
for me, it makes no difference how many of these don't go on to form acceptable
setups. All that matters to me is that when they do form a setup, the
opportunity is 'tradable' for me. I scan a lot of early setups just to find the
few that I will find 'tradable'.
With all that said, let's look at
something I spotted in ZRAN.
ZRAN is in the early stages of a possible
'Butterfly' pattern. I know it would be a Butterfly because of the B point
retracement. Let me put two retracements on the chart and highlight the
potential pattern.
As soon as the B point lands at a .786
retracement the pattern is 'set' as a Butterfly. That has me looking at the
area of the 1.272 external retracement of the XA leg for the completion point.
Let's jump out to a weekly chart for some 'context', and then I'll build a
grouping.
The first two arrows point to two significant
swing-highs. I want to see if Fibonacci retracements off those points land in
my potential pattern completion area. The third arrow points to the pattern,
which looks quite small on this timeframe. I also want to assess what I think
ZRAN may be doing in here.
ZRAN appears to have been going sideways for almost four
years now. I frequently find that patterns set up to test range tops and
bottoms, or areas near the tops and bottoms, can yield some great potential
trades. I have seen many trade setups, though, in the middle areas of ranges,
if the issue just seems to be meandering around, that have 'worked' pretty
well, too.
The interesting thing that I see here is another
potential 5-point pattern setting up from the early '03 low. The XA leg would
be from that low to the high at the first arrow. We would be in the CD leg now.
That leg would complete just below all the lows shown on this chart, testing
the '99 low (not shown), if the pattern structure was followed. (There is also
another possible pattern forming off the October '03 low that the reader may
want to investigate.)
That would bode very well for a trade off
this smaller Butterfly pattern. In that 'context', the pattern is set up to
continue a downtrend into another larger pattern completion area. My main
concern here, though, is to see if anything stands out and red flags the trade
for me. I don't see anything on this weekly chart that screams out at me that
this potential trade should be flagged.
It is also worthy to note that there was a
very large, and quite significant, bearish Gartley pattern that started with
the '02 high and completed at that first arrow. I'll leave it as an exercise
for the reader to go back and look at the numbers on that, but suffice it to
say that it was a very harmonic setup, with a very tight potential trade area
at the completion point. ZRAN may still be reacting off that pattern.
I'll finish
with a daily chart, showing my grouping.
I did a .486 retracement off the swing-high
shown by the first arrow, and a .786 retracement off the swing-high shown by
the second arrow, on the weekly chart. I added in various external retracements
and price projections from the pattern structure itself. They all came together
in the same area. The entire grouping is just about forty cents wide, which is
good. My eye perceives three distinct 'sub-groupings' here, which is something
I strive for. I have a potential trade area and some 'layered resistance' to
help me see how ZRAN reacts on the lower timeframe as it hits the
'sub-harmonics'.
The new '100th anniversary commentary surprise', which I expect to
have available two weeks from today, goes into great detail on these concepts.
It is going to be awesome, and my best work to date. The focus is on practical
use, in real trading, of all of the new material it contains. I will continue
to refrain from giving any more details until I launch this, but I will say it
is going to be a book, and it is going to be entirely full of brand new
material never discussed or released anywhere before. And I mean
anywhere.
Now, what don't I like about this ZRAN potential setup? I don't
like how ZRAN has pulled back so far in here. Even if it does go right up to
the grouping, it will have something along the lines of an ABCD in the CD leg.
I expect CD legs to be impulsive, or at least not corrective. Recall what I
covered in Kane Trading on:
Multiple Timeframes and 'Context' on this. It's not a deal breaker, but
I don't like it.
Next, it has already completed a .786 alternate ABCD correction in
here, which has beautiful symmetry. ZRAN may be done correcting. It rolled over
at a point of major overhead 'supply'. This may not affect the potential setup
directly, since it may just mean that ZRAN isn't going up anymore. I suspect,
though, it may take out that overhead resistance, and is now getting ready to
do this. Why?
Look back at chart 1. Since February ZRAN has been trading in a
fairly tight range. Then in July it broke to the downside, out of that range.
It came right back in, though, without following through to any great extent.
Now it is poised to do the same to the upside. And completing the potential
pattern and then reversing would create a similar 'false breakout' to the
upside. I have no idea if any of this will transpire, but I am watching it as a
potential scenario.
As I mentioned, there are a lot of things going on with
ZRAN, and a lot to be learned by watching this one in here. If anything
noteworthy happens, I will discuss it in here. If ZRAN just drops here, then
the potential setup will be abandoned, with the only thought being that I wish
I would have seen this earlier, since that ABCD looked like a nice
setup.
The next commentary will be the mid-week edition, posted on
Wednesday.
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