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 July 18,
2004 Commentary (weekend edition)-
Today I am
going to revisit the Oil Index. A while back I pointed out a potential setup
that really looked good to me, one that went against what many pattern traders
were thinking. It had proved to be a great opportunity for me, and one that has
continued to offer up continuation trades. I will have more to say about
continuation trades later in the commentary.
Let's look at the XOI as it sits
right now. I will highlight, first, where the original trade opportunity arose,
as I highlighted it back then (understand, of course, that the XOI is an index,
and that I had to decide on a suitable trading vehicle for the trade).
What made this potential trade opportunity
stand out for me was the 'context'. The horizontal line shows the previous
all-time high, from May 2001. The XOI very briefly exceeded that high and
pulled back. Normally, as I explained in Kane Trading on: Multiple Timeframes and
'Context', I avoid areas like this for pattern trades.
I like to
trade in areas where I don't suspect there may be significant manipulation and
game playing. But this was one of those times when other 'context' factors
spoke louder for me. Once the pullback started, it took the shape of a near
perfect ABCD pattern, set up to continue the strong uptrend. Again, I normally
pass on a setup like this right at all-time highs. Some love this kind of
setup, but I don't.
I find, at least lately, that they get slapped down more
often than not. But crude had just formed a similar pattern a bit before this
one, and it had come off that pattern strongly. And the XOI was just giving me
the market feel like it was going to move. Nothing in the fundamentals and the
politics that were going on led me to believe oil was done. I played the ABCD
pattern. But I had another thing I was looking at with this.
Let's look at
what worried many pattern traders on the weekly chart.
The XOI formed this large 5-point pattern.
It's a nice looking pattern. The 'context' worried me, though, as it was set up
to confirm a major top in the XOI from back in May of 2001. I just didn't see
that as likely. Combine my view of the context of this larger pattern with
crude's move of its ABCD pattern, and a perfect retail trap 'stab through the
all-time high' and then back off into a beautiful ABCD continuation pattern,
and I was willing to bet against the larger pattern.
If you like
this kind of analysis and how I filter my trades this way (a pattern is a
pattern does not apply for me, at all), I lay it all out in detail in
Kane Trading on: Multiple
Timeframes and 'Context'. Let's move on to what happened.
The XOI launched off that ABCD pattern and
really made a strong move. It took out the all-time highs and started to chop
up and down wildly, but still setting new highs on each thrust. It formed a
3-drives to a top (which might have been a 4-drives, depending on how strict
one was with their definitions), and then dropped off.
I looked at a
time-similar correction, and I put the .618 retracement on the chart here to
show the area I was looking at. I had many Fibonacci numbers on my chart and I
was looking at many things here, but the time factor and the 'double bottom'
right at the .618 was a very strong combination. Also, look to the left of the
area of the .618 retracement. Notice that congestion/pullback? That's likely
not a coincidence.
So, I was seeing a potential opportunity once again to
get long. But this play would not be based directly off a typical pattern. It
was based on the failure of the larger pattern, as anticipated, and the
previous successful ABCD trend continuation pattern. I expected more move off
those setups. I was looking for opportunities to get on what I thought might be
a continuing trend. This is the key point. Many pattern traders think the
trading opportunities are gone once the initial trade off the pattern is
'done', or if they miss that initial trade.
I feel that
if the move off the pattern, or the move on a significant failed pattern trade,
is strong, a strong trend may ensue. Many patterns yield only small bounces,
but some very significant trends start at pattern completion areas. If this is
something I can see starting to happen, I then look to keep making trades off
that trend until I'm proven wrong. For me, the trade off the pattern doesn't
always end when the first play is closed. This XOI is 'still in play' for me
right now.
Let's look at this again, as it sits today.
The XOI came off that second correction,
again congested around the old all-time high line, and then blasted off. It
gave a great trend continuation pullback entry at the last arrow, and then
blasted off once more. The strength is, and has been, clear in this
index.
There were many potential opportunities to play this, even without
additional textbook patterns and setups. The more standard setups were more
than enough for me, because they were in the 'context' of the larger scope
of what I felt was happening. The original patterns were still in the
process of playing out. Many times I don't see a new pattern but I still see a
solid opportunity.
The next commentary will be the mid-week edition, posted
on Wednesday.
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