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 December
1, 2004 Commentary (mid-week edition)-
Today I will
review a few trades that are still 'in play', and then I'll update the action
in the ES after that pattern on Friday. Before we begin, let me mention that
I've updated the What's
New page, so be sure to check that.
I'll start
with a look at ATG. Recall that this one triggered a 4-Point Continuation Pattern
about a week and a half ago. Let's see what that has done since the last
update.
ATG is still going strong, and hasn't even
triggered one scale out yet for my 'Trading Plan'. This one is in management
mode, and I am using the plan laid out in the last chapter of Kane Trading on: Trade
Management.
Let's look at QLGC now.
QLGC is also still going. For those that want
to follow along, I am also using the same management plan with this one. As an
aside, do you see the pattern that this last thrust came off of? Although I
would have liked point 3 just a bit deeper, this is classic. Look at the
structure between points 3 and 4. A lot of these 4-Point Continuation Patterns
came together in this general area in unrelated issues. It's been a real
interesting situation that I have never seen before.
Let's now
look at the ES after that pattern I showed on the 30-minute chart.
The ES dropped like a rock off the
convergence of factors, but once it hit the area of the lower median line
parallel it rocketed up. Long before the point the ES is at in this chart I
knew 'it was all over'. Not only did it start to bounce in a potential area
that I would expect a bounce, I has a reason why I fully expected this trade
would not go too far. Before I explain that, let's see where the ES is right
now.
The ES rolled back down, chopped all over
like crazy, and then rocketed up strong, taking out the pattern PTA. I fully
expected this. Keep in mind that although I mentioned that the commercials are
extremely short (and they added quite a bit more on the last report, which was
released Monday), it is not a timely indicator. They can take a lot of heat,
and it only implies what their position on the market is, not that something is
imminent.
The market is still going up, and until it is going down, I'm not
fighting the trend. I'm just thinking that heavy long exposure held overnight
is not prudent for me at this point. That's not to say this thing can't go up
quite a bit more. It only says to me the risk is getting greater and greater by
the minute, and unless the commercials start to bring those shorts in, I'm on
red alert.
So, what did I see that made me think this pattern
wouldn't hold? I didn't mention it last time because I was hoping I would get a
few comments asking: 'But Jim, what about the 'context'? What about what you
said in Kane Trading on: Advanced
Fibonacci Trading Concepts?' Unfortunately, I didn't get one response
along those lines.
Part of what I do that is very, very unique (and drives
most other pattern traders to near insanity), and that is I 'game' the
patterns. See, I look at patterns 100% totally different than most pattern
traders. I don't see most patterns (referring to 5-point and ABCD patterns
here) as reversal patterns. Let me repeat that: I don't see most patterns as
reversal patterns. What? You see them as continuation patterns? No, I
didn't say that.
I see their completion areas as 'action spots' or 'hot spots'. They
point to places that I think something is going to happen. My experience has
been that I don't see a lot of consolidation or 'hanging around' these PTA's.
They act like magnets on the way in, and reversed magnets (you know, when you
flip the magnets over and try to push them together) after that. But sometimes
after a small bounce another reversal occurs and the price action flies through
and escapes in the other direction.
As long as it gets away from the area, that
seems to be the critical thing. This is just my experience, and how I use it to
form my trade premise. Given this, I look at patterns and decide to 'trade
them' or 'fade them'. By fade them I do not mean just enter a trade in the
opposite direction the pattern implies. I never just do
that.
I mean I decide ahead of time if I like the 'context', in which
case I look for an entry trigger with the pattern. If I don't like the
'context' I will watch how it unfolds, and look for a counter setup after an
initial bounce. This will have me entering before the issue reenters the PTA,
expecting it to fly through the PTA. Sometimes I play a setup for the initial
bounce, and then look for the counter setup.
I use experience and discretion to
make my decisions. But go ahead and burn me at the stake for using the patterns
like this. This is so heretical and different that I think many pattern traders
think I'm a traitor. Hey, I use what I have learned to come up with the best
plan I can, and looking at patterns as action areas and not just reversal areas
helps me. 'Context' is my
main guide for this. And I'm not saying anyone should just adopt this strategy.
I use it because I think it helps me.
I just need to make it clear that I show
many, many examples that react nicely off a pattern or grouping and then
reverse, take out the pattern, and make a much larger move. I love it when this
happens. To me, that's a great situation. I get an initial move, I can scale
out, and then I can get in on what may be a failed pattern setup.
And I don't
do this by waiting for the pattern to fail; I do it when I get a counter setup
just before the issue comes back to the pattern area. I do it this way because
I don't think the pattern should produce a reaction like that, bouncing,
reversing, and then forming a counter setup right before the pattern area. If
this is in the 'context' of what I call poor 'context', well, it's just what I
am looking for. Again, though, this is my style, and I feel it 'works' for
me.
So, let's see what the ES looked like heading into that pattern.
I'll show a 135-minute chart, which has three bars of data per day.
I don't have to say anything more about this.
If you've read my books and follow my style, I am not about to use a pattern
like that to attempt to call the end of a trend that strong. With all the
factors that lined up I will surely look it over for a 'bounce trade', but I'm
lining things up for the expected reversal and pattern blowout.
The pattern
told me it was go time. But for me 'go time' is not just a play off the
pattern. It's a series of things that I watch for based on the layout. What you
see here is classic, and fits right into my 'Trading Plan', based on what I
have laid out in all the books. It's different, but it's what I do. I'm just
thankful I don't live in Salem…
The next commentary will be the weekend
edition, posted by Sunday.
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