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 April
17, 2005 Commentary (weekend edition)-
Today is
'bonus day' here at the free commentary section, as I am going to 'cut and
paste' two sections from the members' area in here for
people to read for free. I know the members who pay for the service probably
won't like that, but if it helps bring in some new members, and keeps me
motivated to keep doing the service (which takes an incredible amount of time
and is not really 'cost effective' for me), it is worth it. Not that I'm going
to post any big part of what I do in there, just some 'layout scenarios'. I
wanted to share my ruminations, mostly.
Most of what I post in there are setups (in
advance), how I may be managing plays as they unfold, nuances of what I am
seeing, and detailed specifics about my methodology, including my latest work
that I haven't published. I throw in some 'thoughts and ruminations' here and
there. It's some of those thoughts that I will share today. I just want it to
be clear that this is not representative of the average content of the members'
section. I'll use quotes for the area I am lifting. I will do one 'lift', then
something I just wrote up for here, and then finish with another 'lift'. Here
goes.
"First I want to say that the trading aspects of this market are
just stellar, again. This is what I live for as a trader. But I also noticed
something very curious. As you all know, I have my 'e-mail indicator' that I
use to gauge things. I started to see this correlation lately that sort of
baffles me. When the market is going down and the trading action is what I
consider great (but down) the 'e-mail indicator' goes to almost zero, and the
book sales slow right down.
I've been following a few more forums and boards lately,
in a somewhat cursory manner, to see what the attitudes are. These are boards
where supposedly good traders hang out. I am seeing a lot of people looking for
the bottom, and people getting hammered holding on to longs. Can it really be
that a lot of 'traders' out there are still totally upside biased? I thought
all the 90's bubble bull traders were long since washed out, and all that
survived were those with some solid trading fundamentals behind them. I heard a
lot, and I mean a lot, of talk like: 'When is this going to stop, I can take
it...' and 'I just don't understand this bloodletting, I'm getting
killed'.
I am also hearing things like 'Terrible', 'This makes no sense',
'Stupid', and on and on. These are not things an all-around, through all cycles
successful trader would be saying, in my opinion. These are things a bull
market only trader would say. Now I see why my 'e-mail indicator' went to
almost zero, and things slowed right down. On the other hand, this market is
simply superb for my methodology. Now, I know just about everyone in here quite
well from my past interactions, and the fact that almost everyone is a full
book set buyer, and even a student. So I know I'm preaching to the choir
here.
What I'm trying to do, though, is dig into the background of the
players in this game, and see who is moving the market, and who is 'getting
hosed'. Now I have more of a feel, I think, for what a lot of 'traders' are
thinking. The commercials added some back to their shorts this week, and are
still very net short (don't get fooled by all the nonsense you hear out there
about commercial stats, you must look at the mini data in my opinion,
and incorporate that, as it is now a massive percentage of the contracts the
commercials hold). Program trading is just off the scale, in the upper 50's all
the time, and that recent 71.4% reading. And where are the inflows into mutual
funds? I'm just looking at who's doing what.
I want to mention an observation I
have here. This is not meant as a prediction at all, as I don't do those, and
I'm not even saying it's likely. It's just an observation. This has an eerie
similarity to the Friday before Black Monday in '87, to me. Yes, it's oversold,
but it was on that Friday, too. Look at the position, on a daily chart, of the
INDU on that Friday, and today. The markets, across the board, gave up a lot of
key support areas, and the selling was relentless. Many 'average' climaxing
indicators said that's it. I heard about TRIN and put/call and so on all day.
But in extreme panic they go a lot further than they did.
If you look
at things like the VIX, well, it hit 18.05. A nice jump, but a climax? Here's a
trivia question for you. What did it hit in '87? 172.79. Trust me, this thing
could implode right around all those 'climax' figures I heard from everyone on
Friday. But don't get me wrong: I am not calling for a crash. Not even
close. I am only saying I see some eerie similarities in the layout and mood I
have never seen before. I was not watching the market in '87. I don't know what
it felt like then. This is just an observation I wanted to throw out there, so
that you understand that I'm simply not looking to bottom pick this.
I think it's
possible this recent high could have been the start of the next leg down
in the 'big' bear market, or 18 year rolling range we see after an 18 year
(give or take) ramping cycle. Perhaps this it it, and soon we go to new highs.
I can't predict, I just look for setups. At the most, as we will get into soon,
I sketch out some possible scenarios that I can use for potential guidance. I
hope this helps to bring some perspective to some of what I am observing in
this market. So far, it has been following what I suspected, and discussed in
detail in advance many times, since late last year as the commercials started
to get wildly and historically short in a 'bull' market."
Okay, let's
move on. I'll start with an update of the SPY play. I want to mention that this
setup was posted well before the fact in the members' section, and I also
posted it before the fact to a paid forum where I was asked to 'guest
post'.
A lot has happened since we looked at this
one. Shortly after the nice reaction off the area (recall it hit the bottom of
the lower grouping to the penny), the 'manipulation rampers' as I like to call
them showed up.
They ran it right up to the .886 retracement, which coincided with
the very same offset for that downsloping ML, shown with another small black
line (set this one up on the lower timeframe and you'll really see some detail
on how clear this reversal point was, and how nice it was for a reentry or
add-on for me). It then really went into the tank. The SPY showed no respect
for the downsloping ML lower //.
My play, as I mentioned, was to
take the SPY off on the initial thrust down and not hold it over last weekend,
but to retain the options for the longer-term play. The option portion is based
on the traded timeframe and size of the setup. I would then be using a
management plan pretty much right out of Kane Trading on: Trade Management,
with slight modifications, since what I lay out there is my general plan, and I
adjust it a bit in each individual circumstance, based on my
experience.
So far I don't have one single signal to start scaling out yet. As
I have said many, many times, I have a 'give back' style, and to catch the big
moves, the 'runners' like this, I have to give some back to be sure the move is
over. That may not be suited to a lot of other traders, but it's my style. I
try to maximize the 'runners' that I do catch.
Let's get to some more 'lifted'
content from the members' section. "Lastly, let's look at some scenarios for
the S&P.
Here's the most basic scenario and potential
setup I am watching. The market may be correcting back in an ABCD pattern, set
up to continue the trend up. We have a corrective ABCD pattern in the BC leg,
which is the SPY setup I used for the short play. It goes down to complete the
pattern, and off it goes.
I showed just the basic 1.000 price projection outline
here. It's time to put full groupings together, look for the harmonicities, and
any possible line synergies. The nice thing about this framework is it is about
to happen, and is a simple straightforward application of the methodology, if
it weren't for the 'context', the commercials, the nice 5 wave structure up on
the weekly, and so on. It is a setup I have put together on my working charts,
and one I will be watching for clues. It is a key area to be watching
closely.
Next, I can move into some Elliot scenarios. We'll look at just one
on the S&P weekly chart.
Maybe the market is in a wave 3 and not C,
and it goes down beyond the ABCD pattern. I might be looking for a larger ABCD
pattern to unfold, as sketched out on the chart. Then the 'bull market'
resumes, and new highs are set. I did not scale the layout on the chart for
time or price, I just 'roughed it out' for demonstration purposes.
One can come
up with an almost infinite number of possible scenarios, and I don't spend a
lot of time on that, but these two potential layouts have some use as far as
helping me judge 'context' and possible setups that may form, so I showed them
here. If I look over the even larger picture a few things jump out. I'll cover
those and then we'll quit.
If I looked at the chart without knowing the timeframe
or the issue, and took out any bias I might have, my first thought is that this
hasn't corrected enough from the last uptrend (added note for the free
commentary for clarity: I'm referring to the entire secular 'bull market' run
from the early 80's here). Picture it as a 1-minute or 3-minute ES chart. I
would think the correction isn't over.
I would think it did an AB leg down, then it
just finished a BC leg up, and now it's going to do a CD leg and complete a
corrective ABCD. I have, and might here, try to trade the CD leg down, if this
was a 1-minute ES chart. Tell this to anyone (do the CD price projection and
you'll see why) and they think you are insane beyond any hope.
If I was
thinking this was another possible scenario, this BC 'bull market' leg would be
a 5-wave impulse move. That's not what I would expect, generally. This has all
the Elliot wavers saying this can't be, and so they are saying this must be a
wave a of an abc (what I would call the AB leg of an ABCD) up. To
that I say no. I have seen many, many cases of clear corrective areas of 5
waves, like a wave 4 that was a perfect impulsive 5-wave (not an abcde
correction).
An example was that EBAY wave 4 bounce play I highlighted a while
back (it's in the archives), where wave 4 was a textbook 5-wave impulsive move.
It happens. Strict Elliot wavers have no idea how to explain it, but I am a
'practical Elliot waver', and it happens. This may be one of the times when it
does, and it would fool a lot of people. No one is looking for it, that's for
sure.
So, if this is the case this down move may not be an ABCD, but a
5-wave impulsive move that carries down a lot further. Again, the unfolding
structure will give me clues as to what setups I want to play. And that's all I
care about. None of this may unfold, and that's just fine with me. I'm just
showing the reasoning I use to assist me with my setups. All I care about is
finding the setups. I hope you can use my thinking process here to help you
learn how I do what I do. What I have shown varies little for me from tick
charts to monthly charts."
I hope that you have enjoyed this commentary. What you
saw today in here is just a fraction of what I post in the members' section
each and every time I post there. As I said, most of it is setups in advance,
and detailed discussion on my application of the methodology. I especially
focus on finding the synergies between my Fibonacci groupings techniques, the
patterns I use, and median lines and other lines, in order to find the setups
that meet my criteria. If it isn't practical for me, and focused on actual
setups I can trade, it's not in there.
Next weekend I will be mentoring a student,
so the commentary might be delayed until Monday. Likely I will start working on
it early so I can have it on time, but I'm leaving it open that I may delay it
a little. My first responsibility, as far as commentary, is to post for my
members, so I can't work on this commentary until after I get to that. And
after days of extremely intense non-stop work with a student, I usually have
less than zero left. So the next commentary will be next weekend's edition,
posted probably by Sunday April 24, 2005, but maybe not until Monday.
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