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 November
3, 2004 Commentary (mid-week edition)-
Well, I've
done a lot of updating around the website just recently. Instead of covering it
in here, I will refer everyone to the What's New page, which I've also
updating with all the details. Please take the time to take a look at that, and
then come back here for some chart work, as promised.
Today I'm
going to cover something that I saw in the intraday ES yesterday. I think it is
an excellent example of 'context', and how it can change the outcome of a
potential trade scenario. I realized as soon as I decided on this example
series, though, that there is no way I could delve into this with anywhere near
the level of detail it really needs.
At best I can touch on the basic ideas. There
just isn't enough time and space to do it justice. Nonetheless, I will do what
I can with the allotment of resources at hand. What will be interesting here is
that I chose an example where my assessment did not lead to the best possible
trading outcome. Not all my examples are 'well-chosen'. Trading doesn't 'work'
every time, and a lot can be learned from examples that don't 'work'.
I always
thoroughly assess what I think happened in each case, but I don't change my
plan based on one outcome. Not all assessments will turn out to be the
best-case scenario. Many traders 'chase their tails' by constantly changing
their 'Trading Plans' every time they miss a trade. This is a trap to
steadfastly avoid.
Let's start with how the ES looked in the afternoon, on
a 3-minute chart.
There was a very nice, very tradable run up
in the morning, which I was 'all over'. Then the ES went into a tight, rolling
chop range, with a slight upward bias. I have been trading a little too much in
these types of circumstances in the last few days, trying to get on board
before breakouts occur. I'm not saying there is anything wrong with that, but
there are times when the action is just too poor and I should 'stand
aside'.
I haven't been 'standing aside' enough, and I was thinking maybe
old retired 'Mr.
Hat' was about to 'un-retire'. So, given that, I got my discipline back
on track, and I hadn't taken any trades since the early morning run. Then I saw
something setting up. Let's look at that.
The ES set up a great looking bearish ABCD
pattern, with an outrageously tight grouping. This is a close up of the last
bit of data from the last chart. If you look back at that, you can see the ABCD
on the far right hand side of the chart. But here's the issue.
Given the run
up, the overall bullish tone of the market, and my read of the situation, there
was just no way I could look the first chart over, and the higher timeframe
charts, and create a bearish trade premise. I just didn't see it. That's not to
say I couldn't easily be switched over if the charts changed, but at this
point, I just was not willing to take this trade. Instead I decided to see how
the ES reacted off the grouping.
I was thinking about a possible
alternate way to play this. If the ES reacted off the pattern but failed to
take out the C point, and then gave me a reversal entry trigger, I might take a
shot at a pattern failure trade. I could have a very tight, technically placed
stop for such a trade. I stood back and watched, and got my trigger. This is
what happened, on the 1-minute chart.
The ES did exactly what I suspected it might
do. There was an initial reaction off the pattern, but little follow-through. I
then got my reversal signal. I highlighted the approximate area of my entry
trigger with an arrow. The ES really took off from there. So far, so good. Then
I saw something shaping up.
The ES was putting this 5-point pattern
together at an .886 grouping. The grouping itself, although it looks a little
spread out in this close up chart, was only about a tenth of a point wide. I
wanted to see how the ES was going to react to this. I felt the most likely
thing was a small pullback reaction, and then a burst to new highs for the day.
Here's what happened next.
The ES came right off the pattern. I didn't
like the structure of the AB leg, as readers of Kane Trading on Multiple Timeframes and
'Context' and Kane Trading
on: A Totally New 5-Point Pattern will understand, so that slightly
detracted from the pattern. Otherwise, though, this was no cause for me to
consider abandoning the validity of this new setup.
I didn't want
to play short because of my 'context' premise, but the long side wasn't acting
right. I also felt the pullback area was just a bit lower than what I would
expect if this latter pattern was going to get taken out. I was starting to
feel like this was not a good place to be in any longer. I wanted to let it
breath and work, but it was looking kind of 'spooky'.
Then they
started to hit the bid with blocks. Lots and lots of blocks. Instantly I
bailed. I called this live in the chat room. One word: Out. After that, as I
was typing my feelings that something was really not right here, that something
happened. Apparently they announced a preliminary election poll result that was
the opposite of what the market expected, and that was it. Here's what happened
not sixty seconds after I bailed.
I saw it coming, and reacted quickly enough
to essentially scratch. If I had waited just a bit longer, once it broke
beneath the ledge, there likely would have been terrible slippage. I was asked
in the room right after that if I was happy for making such a great call to get
out right before the drop. My answer was along the lines of well, sure, I'm
glad I made a read and got out just about right (maybe right was a bit before
this?), but I'm kind of wishing I had hit that bigger pattern.
I like to use
patterns to set me up for a range break. I find this is a common occurrence, to
have patterns give me a setup for the range break. I play for this. In this
case, though, my 'context' evaluation precluded me from taking the setup. In
hindsight, I played exactly according to my 'Trading Plan'.
If I had to
do it over, the play would still be the same. I can't change my 'Trading Plan'
because news hit the market in this one case and the 'context' was overridden
by that news. Not all 'reads' are the ones that turn out to play out the most
favorable. That's trading, especially discretionary trading. As they say:
'We'll get them next time'. As an aside, isn't it curious how such news came
out right off that great looking pattern? I know, it's a
'coincidence'…
The next commentary will be the weekend edition, posted
by Sunday evening. I'll update the open plays I have been discussing
then.
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