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 November
17, 2004 Commentary (mid-week edition)-
Today I'm
going to quickly go over some business, and then we'll look at some charts. I
expect that by the time most of you read this I will have Trade Management back from the new
printers. If all goes as they promised, I'll be shipping all those pre-orders
off Wednesday after the market closes. I will also be removing the free
shipping special for Trade
Management at that point.
It may take me a day or so to redo the books
page, but as long as the header says free shipping after you refresh I'll honor
the free shipping. If you want to take advantage of that do it right away, as
getting that page updated to reflect the availability of the new book is high
on my 'to do' list.
One more item before we hit the charts. Scott Carney
over at Harmonic Trader has just written an article for
Trading
Markets, which right now is listed on the front page of their website.
If you are a member over there check it out, and if not, I think they have a
free trial so you can get access to it.
This is great exposure for harmonic trading,
and it is quite an accomplishment, in my opinion, for his work to be posted
there. If you check it out and like it, send them an e-mail and tell them you
want more of his work. It's good for all of us if he continues to write for
them.
Now, let's take a look at something I saw the Friday before last. I
saw this 5-point pattern setting up in the NQ on the 13-minute chart. I wanted
to show this today because of how it played out. I try to choose examples that
don't just 'blast off', but instead are what I think of as more 'typical' or
average, when a reaction occurs. Let's start with a chart showing what I saw
shortly after the open on Monday.
I saw a nice looking 5-point pattern forming.
I did see one problem with this setup right off. Do you see it? If you are a
reader of my books you are likely already looking very carefully at this
layout. Let me show the groupings that came together. I'll show this on the
3-minute chart.
I had another alert at this stage, too.
Although these look like two very tight groupings, exactly like I prefer, they
are comprised of numbers that I expected would fall in the same area. That's
not to say that the area I am looking at is too wide, since the two groupings
comprise a total area of under just two points.
What alerted me was the possible
lack of 'harmonicity' here.
Based on my experience I had to eliminate numbers I didn't expect to eliminate,
and although two tight groupings formed, they didn't come together like I
thought they might.
I also threw a time relationship on the chart as this
was getting close to possible completion. Whenever I see anything obvious like
this I keep an eye on it.
Let's see how the NQ reacted in this area.
The NQ reacted very strongly, right off the
.886 retracement to the tick. It was a well-triggered move, and a nice, smooth
trend. So, what's the problem? Let's see what happened next.
The NQ reversed and went back up to the lower
grouping, which was also an .886 retracement for the move it had just made. It
then reversed again and went into range mode. Eventually the groupings (which
at the point this last chart was captured were then totally 'out of play' for
me) were taken out.
So, why did I choose this example? Well, if the 'traded
timeframe' was the 13-minute chart, how does this move the NQ made look in that
'context'? It was not all that great of a move for that setup, on that
timeframe. The move went to just about the .618 retracement of the CD part of
the pattern, but that was it. It was not a major reversal.
For my
'Trading Plan' I am more than happy if I can get an initial thrust like this,
and then I can get into management mode. Perhaps I take some of the trade off,
and/or move my stop. As it reverses and moves against me I start to scale out.
This is all I can ask for. I want to get to 'management mode'. It is there that
I can increase my 'safety', and be positioned for the bigger things that happen
some of the time. I see a lot more moves like this than big runners.
Now, what was
that thing I noticed right off that had me very cautious with this setup? Let's
look at the 13-minute chart again, with a lot more data on it.
That pattern was set up to call the end to a
very long trend. The reader should pull up 60-minute and daily charts and make
an assessment of this setup with full 'context'. This is not how I like
to trade patterns like this. It's not to say I won't trade them at all, but I
surely expect a 'bounce' and not a reversal if I do.
I find
'context' much more important than just about anything else when I evaluate any
pattern or setup. A setup is only as good as its 'context'. I wrote Kane Trading on: Multiple Timeframes and
'Context' because so many readers asked me to elaborate on how I use
'context'. I always say: "Without 'context', you have nothing."
The next
commentary will be the weekend edition, posted by Sunday evening.
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