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 November
6, 2005 Commentary (weekend edition)-
Last week was
another extraordinary week for trading, in my opinion. I say this not to point
out that I think my own trading is going exceptionally well, but to get my
opinion out there that I feel this market trades very well, and if you are not
finding it that way, don't get discouraged. Work your 'Trading Plan', keep
putting the time in, and see if you can find what works for you. Don't blame
the market, because in my opinion it would be hard to find a better trading
environment than we are in right now, outside of another bubble bull market.
And as I have said, the volatility of a bubble, plus the lack of meaningful
corrections, can make that more difficult to trade than what we have right
now.
Let me make one quick point before we get to today's charts. One of
my big sayings around here is 'for those who want to do the work'. I emphasize
the level of work it takes, and that this profession, if you want to try to
make it as an independent, home-based trader (or as an on or off floor trader
of any kind, as I have a lot of clients who trade on exchanges, or 'upstairs'),
requires the work of any profession. Some people see the level of detail of my
work, and they get overwhelmed and say they are looking for something simpler,
and easier. It's not for them.
Now, I would be the last person to try to
talk anyone into studying work that they aren't comfortable with it. On the
other hand, my point here is that I think any worthwhile methodology is going
to be a lot of work, whether it is mine, someone else's, or one you develop
yourself. Yes, some 'scalpers' have very simple methods, and I hear that these
methods work for them. I'm not 100% convinced they will work over long periods
of time, when large changes and shifts occur in the market, but for now they
say what they have works.
I think what I have developed is particularly good for
me because it applies, for my 'Trading Plan', across all timeframes and all
liquid issues, from tick charts to monthly charts, from minis to FX, from
stocks to all manner of liquid futures. I think it is very adaptable and should
be able to be workable for me regardless of market changes. Any methodology
that can do all this will be a lot of work. What I am trying to say here is
that my constantly pointing out the level of work it takes is not
something I am saying is specific to my work. It is something specific
to being a professional of any kind.
I am trying to make it clear to people that
if you find any methodology you are studying way too much work for you, be sure
it is that the methodology is truly just too complex to be practical, and not
that you are chasing from one methodology to another, looking for 'simple'.
Having worked so much with what I do I can say straight up that it isn't all
that complex. Now that I have the ideas down I can look at a chart and see if
there is anything I want to work up in seconds flat. I can usually work an area
up in two minutes or less.
I have had 'scalpers', who were dependent on let's say
one single indicator for their entire methodology, train with me because, as
business people, they could see the risk to their business that they were
taking relying on one thing. If for some reason that one thing was no longer
available, or stopped 'working', they were out of business. My approach doesn't
rely on any single thing, and, I feel, is much less vulnerable to changes. What
I want to convey here is that I think you are going to have to work hard,
really hard, to succeed long-term in this business (or any business), and I
don't mean that specifically with regard to my methodology. It really isn't
that complicated once you understand it.
With all that said (and I hope it
helps some people out to better see what I am saying), let's get to some
charts. The theme I have been going with lately, of following up on the weekly
chart, seems to be working well, so I will stay with that for now. It should be
clear that I am specifically picking charts not to show potential trade areas
(PTA's), but areas where I can find things out about the intentions of an
issue. Perhaps I am already in a trade off a PTA, and I am making management
decisions, or something of that sort.
Let's start with last week's chart, on
ERTS.
This process can be a bit difficult in here
because the reader has no idea what the 'context' is for the chart, or the
setup. (I have gotten some positive comments so far, though, that trying to
figure out the setups and 'context' has been a very useful challenge.) This one
had a major pattern that I saw many pattern traders taking. The pattern
completed at the area of the first arrow, and signaled a potential long trade
there. I did some work on this one to offer up my assessment of the things I
would be watching for with this long.
I put this 'adjusted' median line set on my
chart (once the pattern low bar was in place), as per the way I laid it out in
Kane Trading on: Median Line and
Fibonacci Synergy. ERTS starts off quite well, and reaches the area of
the median line upper parallel. This is the area where I want to watch the
price action and the structure of any pullback. You can see ERTS did pull back
right to a grouping, and has rushed right up off that to 'test' the line again.
This is a critical spot here for me.
Let's drop
down to a 60-minute chart, and see what ERTS looked like as it did all
this.
Now this is just superb action. I put another
'adjusted' median line set on my chart, and ERTS was using it all the way up
off its reversal point. Once it hit the bigger set median line upper parallel
(right at the upper parallel for this set!), it backed off in an ABCD, right to
a tight grouping at the intersection of that lower parallel and a median line
from another, smaller set. Again, how I choose these lines, patterns, and
groupings is detailed in MLFS. Now ERTS sits right at that line again.
It should be totally clear why this is important to me, and why I am watching
so closely here.
Let's move ahead a bit, and see what ERTS is doing.
ERTS came off that area and 'tested' that
grouping. I didn't show it, but put a lower warning line on that upsloping set
and see where that hits. Curious, huh? Do you think I had that on my working
chart? Keep in mind that I am assessing this from the perspective of a very
large-sized pattern trade on the daily. The 60-minute chart here is for some
fine-tuning management assessment. I could add to my position at that grouping
area on an entry trigger if I wanted, also.
If I wanted
to move my stop (that's an entirely different topic, and what I do is laid out
clearly in Kane Trading on: Trade
Management) I would not place it just under the grouping, as another
ABCD could have been forming, and would have completed just under there. I
would have to go a bit below that, for obvious technical reasons. All this
became 'academic' very quickly on the open the next day as ERTS exploded. With
the move off this last 'test' of the grouping ERTS actually set up and came off
another one of my patterns.
Let's see how all this looks on the daily chart, and
I'll make some concluding remarks.
ERTS just made mincemeat out of that median
line upper parallel, as it should have if the pattern was dominating and
guiding the price action. This is classic, textbook behavior around lines like
this, in my experience. I watch things like this all the time, to make
decisions as a trade unfolds. I base a lot of my discretionary decisions on how
I expect price to behave given what it is encountering. I assess what is
unfolding based on the methodology. I find, for my 'Trading Plan', that this
style of analysis provides a significant increase in my effectiveness. If it
didn't, I wouldn't spend the time doing it. I hope it is a lot more obvious
what I am trying to show now with the weekly charts.
Let's follow
up on that 10-year that we have been watching.
The 10-year just keeps rolling down, right
off that area I showed in advance in the Jim's Chart of the Week. It didn't
show any follow through off the 1.000 ABCD. It is now at an alternate ABCD
area. I added on another warning line, which hits right in here. The ZN did
react a little bit, and formed this 'spinning top' bar. Given the relatively
huge size of a potential ABCD in here, the level that is just normal price
action noise is quite large. I would need to see some serious action to be
convinced the ABCD is playing out. I still suspect this is more like a big
'wave 3'. Keep a close eye on this, as rates backing up are going to put a lot
of heat on this economy.
I'll close with an 'extra' that I thought was so pretty
I just had to show it. Here's one I discussed in the members' section, in
advance.
PETS put together this beautiful ABCD, with
an ABCD in the BC leg. The grouping was tight, and I had some other things
pointing to this area. I just showed the basic framework here. It takes right
off from the PTA. I put a 'standard' median line set on there, and mentioned to
the members how I was watching the upper parallel to make management decisions.
My obvious choices would be to scale some out on a reaction there and move the
stop up, scale it all out, just move the stop, and so on (this is all explained
in detail in Trade Management).
PETS reacted right off the line, and came
down to a trendline I had on there. It reacted very strongly at that line,
highlighted by the second arrow. It just exploded off that line, and hasn't
stopped since. I put 1.272 and 1.618 external retracements on there to show
areas where I was watching closely for reactions. Other than a tiny reaction at
the 1.272, PETS had no regard for those spots at all. It is just smoking up.
This is what I call a 'runner', and when I get one I let it run for all it will
give, and work my various trailing
stops, letting it tell me when it's done. This is a great
example of why I don't use 'profit targets'.
The next commentary will be next
weekend's edition, posted by Sunday evening, November 13, 2005.
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