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 October
16, 2005 Commentary (weekend edition)-
Boy, that was
another spectacular week for trading, in my opinion. Things were 'seeing' my
areas all over the place, from the mini's right up to the daily and weekly
charts. As you all know, unless you are brand new to this commentary, I'm
really a 'timeframe
trader'. I hunt for setups, and I don't care what timeframe they are on, or
what type of issue they develop in. I am comfortable with mini's (from tick
charts all the way up to the 60-minute timeframe), FOREX, grains, treasuries,
metals, energy, stocks (and options, including complex plays), just about
anything, right up to monthly charts.
What I want is the best setups, and by being
so 'diverse' I can find a lot more layouts that I can work with. That puts me
in a situation where I am not at a loss for setups, but instead I'm choosing
among the setups I have at hand at any given time. By 'working' the timeframes
I can fine-tune each layout as far as stop placement, position size,
management, etc. for that specific timeframe and issue. This is a skill unto
itself, in my opinion, and the time I have invested in this area has served me
well. It adds yet one more area where I can attempt to develop a small edge in
my quest to accumulate a lot of small edges in my 'Trading Plan'.
Today I'll
review and update a few of the past charts from Jim's Chart of the Week, and
then we'll look at two recent setups. I'll start with last week's chart of the
NASDAQ Composite Index, on the daily timeframe.
The last arrow shows where I was watching for
a 'test' from below of the key ABCD reversal area that sent the COMPX up to
that median line upper parallel. That's the area where it reversed sharply at
the .786 and upper parallel intersection. This area was penetrated to the
downside rather easily, and I suspected a 'test' from below might be a good
short entry spot for a 'quick' play. I had already been triggered short at the
upper parallel, so this area was important for me from a management
perspective, too.
I don't use 'profit targets' at all as most of you know, preferring
instead to use various management techniques where the market tells me when
it's over, so I would not be closing a position here at such an 'obvious' area.
I wait and see what happens, and manage accordingly. Sometimes in cases like
this I may add on if I get a trigger at an 'action spot' like this. Let's see
what the COMPX did from here, and then I'll discuss why I felt it was likely
going a bit lower before it would bounce.
The COMPX rolled right off that spot and
dropped over seventy points before it started to bounce. I was expecting it to
bounce in here for two reasons. One, it was extremely 'oversold' from a market
internals standpoint, and two, this is the area of a bigger ABCD with an ABCD
in the BC leg. Even though I suspect this is only going to bounce for a while
(I'll let the market tell me that), I had a very good idea, from a probability
standpoint, about how far this was going to go. Look to the left on this chart
and you'll see some standard analysis pointing to a bounce, too.
The point
here is that I was able to see an area I thought was an 'action spot', even
though it wasn't a 'full blown' setup. I can use the previous areas and setups,
together with the entire layout and the 'context', and find additional areas
that may give me information. If I'm not immediately trading, or if I'm in
management mode, I'm on the hunt for information. This is a key way that I find
that information.
Let's look at that 10-year now. I'll show the electronic version,
the ZN. Recall how two weeks ago I showed an 'action spot' on that one, and how
it 'tested' that from below. We looked at that in detail on the 15-minute
chart. Let's start there.
This is where we left off, with me showing
how the ZN used the area I highlighted in the previous Jim's Chart of the Week.
I wanted to follow up and show what it has done since this time. Recall how I
explained the various ways I may have looked at this as the ZN 'tested' the key
line from below. Let's go to the daily chart, and get some perspective.
Here's the same chart I showed two weeks ago,
with current data. The last arrow shows the 'action spot' I highlighted when I
posted this chart in Jim's Chart of the Week. Both of the today's charts were
posted in advance, of course. The ZN is still grinding down, and has taken out
that key swing-low on a closing basis. It is approaching those ABCD areas, and
another warning line. There is also a modified Schiff median line lower
parallel I am watching that I didn't put on there, so as not to clutter up the
chart too much here.
Rates are backing up, and some key decisions are going
to be made soon. It is possible that this is a 'wave 3' here and not a CD leg
(c wave for you Elliot people), and it may have a ways to go. I just watch the
lines, patterns, and Fib areas and let the market tell me. If I hadn't been
short at the time I could have used the 'action spot' I pointed out to open a
play, or I could have used it as an add on spot. If already short, then it is
an area I would not want to see breached aggressively from below. I'm looking
for behavior to follow my expectations, based on my experience, and when I see
deviations, I factor that in to my management.
Let's look at something from this
week's S&P.
This is a very stripped down version of the
line work I had on the S&P, but I cleaned it up to show just this one
aspect. The median line set is a 'standard' one, and the lower line is a cloned
line of the upper black line, keyed off a noticeable swing-low. That upper line
is what I call a 'slope line', and it represents the slope of some previous
price action, usually based on some obvious swing points. This is something I
explain in Kane Trading on: Median
Line and Fibonacci Synergy.
The interesting thing for me here was the
time factor. The intersection told me not only where I might look, price-wise,
but also when I might be looking there. Now, just like with all my
techniques I don't (and pretty much never would) trade off just one aspect like
this, but it was a factor in my overall assessment. I had many things like this
on most, if not all, sectors and indices I watch, all hitting their price and
time areas at the same time. This was a bounce I was expecting, and if it
didn't happen, that would have told me something.
I explain in MLFS how I am
looking for the synergy of a pattern, Fib grouping(s), multiple lines,
'context', time factors (of several types), and various additional things all
to come together to form my preferred setups. Just because I show different
aspects alone doesn't mean I trade such a stripped down setup. I do this just
to show the aspect in a simplified version so it is easier to see and
understand.
I'll finish with a nice setup I found in the cyclical
index.
The cyclical index is one I had discussed in
the members' section
recently. Again, keeping in mind this is a stripped down version, I had this
set on my chart, and I was very happy with how the index was using it. By the
time the area of the arrow came around I had seen multiple tests of the set, in
areas and in the manner I most prefer, according to what I laid out in
MLFS.
The CYC.X bounced up off that median line and hits a very big, very
key weekly trendline from below, and it did this in the form of an ABCD. Drop
down to a lower timeframe and look at the various aspects of the structure. It
was just beautiful. This ABCD completes right at a .382 retracement. Do full
groupings here with all my numbers, as well as full line work, and take a look
at that. This is about as clear as it gets for me. The CYC.X rolls over and
drops like a rock off the area. Notice the action around the median line on the
way down.
I do a lot of sector and index work. I prefer to trade ETF's
whenever possible, so as to avoid the 'news shocks' that can happen with
individual issues. When I work a sector I look to see if there is an ETF that
closely mirrors it. If not, I look over the key stocks in the sector, and see
if any have a similar, or equally good layout. I have been asked many times
what I do when I analyze an index or sector and get a setup. It seems like it
would be fairly obvious, but I get asked enough that apparently it isn't, so I
wanted to elaborate. There are so many ETF's out there the marketplace is just
glutted with them. All I need is liquidity, and my choices are many.
As I close,
let me mention that I am now watching the key .300, .382, and .447 areas to see
if this 'bounce' is just a bounce, or if the 'correction' is over. It doesn't
matter to me, as I just go with the flow and the setups. These are the areas
where the market will give me some solid clues as to its intentions. I'll be
watching the synergies as they come together, and the reactions to those areas.
And, as always, I'll be focusing intensely on the money flow. As I tell the
members all the time: treasuries, currencies, gold, energy. Watch the money
flow.
The next commentary will be next weekend's edition, posted by
Sunday evening, October 23, 2005.
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