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 February
5, 2006 Commentary (weekend edition)-
Well, I'm at
a loss, again, to break away from my broken record approach. The market is
continuing to trade just fantastically, with the Russell pushing the limits of
my vocabulary every day to try to come up with new ways to describe the action
to myself. As I sit for endless hours at my trading station I talk to myself a
lot. Perhaps that's not something I should say out loud, for fear of getting
locked in a rubber room someday. Nonetheless, I spend some of that time trying
to come up with new superlatives to describe the Russell movement intraday.
Those that follow my methodology, and my students themselves, know what I
mean.
You don't have to use my work, though, to see this. Just pull up a
3-minute chart and look at the moves, and look at the reward/risk possibilities
on this thing. The last time I saw this was when the FX market first got
popular, back when they had 'guaranteed stops and fills', and it was not
uncommon to see 5, 6 or even 7 to 1 reward/risk setups. Those days are gone. I
wonder if this action in the Russell can last. I hope it can, since it is
unlike anything I have ever seen before. Not that my 'regular' setups on the
'usual' issues haven't been just incredible, as the very brief, before-the-fact
examples I show in here attest to, it's just that this Russell is on another
plane, in my opinion.
Let's get to some charts. I'll follow the
same pattern as I did last week, since it is working so well. I'll start with
last week's Jim's Chart of the Week, showing the Cyclical Index.
Before I even comment, let me state the
obvious again, for those that don't understand this. I do a lot of work with
the indices and sectors. A lot. I look for ETF's to actually trade, or
key issues within that arena. I look to see if they have a similar pattern and
setup, or just a setup, period. Just because I'm showing an index or sector
doesn't mean it's even slightly difficult for me to trade off of it.
Now, let's
get to the point of this 'lesson'. I am not just trying to show potential trade
areas (PTA's) in the Jim's Chart of the Week, I'm trying to show how I think,
where I watch, and hopefully have it become clear why I watch there. I look for
many factors, then, to decide on if I want to actually make a trade. All these
are laid out in the books. Each one is a separate concept, and has its place in
my 'Trading Plan'. A few are entry
trigger, 'context',
synergy, the PTA itself, management, initial stop setting,
expected value for the trade, intermarket analysis, and so on.
In this case
it was a big question whether the rampant bullishness in the market was going
to continue, or if the issues, most of which were simultaneously hitting key
areas, would roll over. I was watching all these areas for clues. Unlike many
5-point pattern traders I do not need to catch things dead off the reversal
point, in fact, I am playing well established trends on my traded timeframe, so
I frequently drop down a timeframe and once a move is going off a PTA I trade
the established trend down there. I showed the 'up' arrow and the question mark
to imply that this was more than a PTA, it was also a key market decision
point. This is hard to do with a single chart and no text, but I think I got
the idea across.
Let's see what happened.
I added on a set from before from some work I
did with the members. I can't recall if I showed that set in here, I think I
did. That put a very key, very well used and 'tested' median line lower
parallel right in my area of interest (add on the division lines and warning
lines and you'll see some interesting things). Although I am showing three very
important things right in this spot, I had quite a bit more, too. The CYC.X
dropped like a rock right off the area.
Go to a lower timeframe and you should see
not only plentiful entry triggers, but also a great pattern and pullback
opportunity, and a nice example of a lower timeframe 'established trend'. How
many time in a row do I show these things to everyone in here, in advance? You
should have seen the members' section. Point is, I'm showing the work in
advance, and it is frequently playing out as I suspect it may. It gives me more
than enough to build my 'Trading Plan' around.
Let's look at the S&P.
Here's where I left off with the S&P last
weekend. I hope you watched the area I pointed out with that last arrow, in
advance, of course. I'm sorry I keep saying that, but I get tired of people on
message boards always putting down everyone (not me specifically) saying they
do all after-the-fact analysis. For me, explaining after-the-fact is the only
way to teach the methodology. If nothing has happened what do you teach? In
here I'm showing plenty before-the-fact, and then analyzing those. This way it
is more than obvious I am watching these areas before anything has happened.
There can be no question about how the methodology points out the areas of
interest for me before-the-fact.
Let's see what the S&P did from
here.
Is that sweet, or what? I hope everyone read
last weekend's commentary and were able to study this live as it unfolded. It's
great for the learning experience to see a workup and then watch it unfold, and
study the various aspects as they unfold. This was the type of thing I did
pretty much daily in the members' area (can you see I'm suffering a little
withdrawal?). The S&P dumps right off the area, and heads right for that
lower parallel.
Keep in mind I can only explain a small fraction of what I an
seeing and how I am setting up my areas in this commentary. The various
advanced aspects of this are in the last two books, in great detail.
Look at this weekend's Jim's Chart of the Week to see what I am watching for
now. I will watch the price action in the two key areas I highlighted there to
see what the behavior tells me. Keep in mind two things: first, those are not
the only ABCD areas I have, nor do I have any of my lines on the chart for the
ABCD's, and two, as I said, I do not have to catch the exact reversal point to
be able to utilize the information I get from the area in order to make a
trade.
Let's look at something I showed the members as we neared the end
of that journey.
I showed a nice ABCD in the Yen, and it
rolled over off that, and then gave a nice pullback. This is shown at the upper
arrow. That is the area I was interested in a short. Drop down to a lower
timeframe and my reasoning should be clear, especially if you have the latest
books. The point here is what happened at the second arrow. I showed this area
to the members and said to watch there.
This could have easily been chosen as a Jim's
Chart of the Week. There are two key lines there and an obvious .382. It was
also a smaller ABCD pattern (with an ABCD in the BC leg) off the larger ABCD
pattern. This was the key point the Yen would tell me which pattern, and hence
direction, it was intending to follow, for the time being.
The Yen spoke
loud and clear, and the 'context' of the larger ABCD prevailed. This area was
crucial for me to watch, and was a big 'area of interest'. It was not a
PTA for me. That might have changed if I saw a strong reaction with say an ABCD
pullback and then a trigger off that, but as it stood, my interest was in
management. I already had my short trigger. A key area was setting up. What
happened there greatly assisted me in my management decisions.
Remember, as
crazy as it is, and as many jaws as this still compels to head straight for the
floor, I do not use 'profit targets at all. I use various trailing stops and other methods to
stay with a trade until the market tells me when it is over. (If I used
a profit target on this one I would not be able to be in for this much larger
move down the Yen has done.) Reactions, or lack of reactions, at various key
areas helps me in making the adjustments I do.
That is my point here. If I showed
this chart in Jim's Chart of the Week I could see a lot of people thinking the
area 'failed'. That's the problem with trying to show things in advance. Unless
you know specifically why I am watching there, and what I am trying to do, the
area is of little use. On the other hand, look at the area on the lower
timeframes and you'll see there wasn't any entry trigger whatsoever off the
area, so even if I were watching this as a PTA I wouldn't have done anything
with it.
Let's finish with something I showed in OJ.
I got an e-mail from a full set buyer asking
what my workup looked like on OJ. This is a market I follow, so I already had
it worked up. This was back at that ABCD completion point. I had lines, I had
Fibs and harmonicity, I had a pattern. OJ reacted off the area and has been
moving up strongly since. Now, is my point here to show another great setup
that played out? Is Jim trying to brag here?
No, not at all. We all know what
happens at my areas in many cases. No, it was that .382 area at that ML upper
parallel that I told this reader I was going to watch. See the repeating
pattern, just like with the Yen? OJ reacted ever so slightly to that area, and
then blasted off. I sure wouldn't be thinking about a 'profit target'
there. I sure was watching to see what OJ was going to do there, and it
spoke loud and clear to me.
It's a hard concept for many traders to grasp, that of
reading price action and actively managing a trade based on what the price
action says. To me, it's highly skilled discretionary trading at its best.
There is so much more to trading, and so much more to my methodology and
'Trading Plan' than finding PTA's that I can barely emphasize this enough.
PTA's are perhaps 10%-20% of my entire plan, at the most. Many traders don't
like the discretionary aspect of trading. Perhaps, and I say this without being
condescending in any way, shape, or form, what they really don't like is
operating without sufficient skill for the task at hand.
Let me put it
this way. Say I find myself in the operating room, but instead of being a
patient, I'm the surgeon. I look around and my team is ready, awaiting my
commands, and the patient is opened up. My chief assistant says that it looks
like there is this complicated scenario unfolding, and I have to make a
decision on how we are going to handle this. It's not a 'textbook' case. And
each potential scenario that could unfold as we proceed will open up the path
to more discretionary choices.
Now, I can come apart at the seams and panic
and say I only want to do easy 'textbook' cases, or I can take the immense
skill that I have spent so long working on and developing, and make critical
life or death decisions for the patient with the confidence I have built up
from experience. Discretion should be scary or nerve-wracking, and full
of confidence-breaking feelings, if one is trying to do it without the
necessary skills. In my opinion, that's why so many people struggle so much
with discretionary trading, and fear it so much. I'd be afraid to be that
surgeon if I didn't have the level of knowledge and experience in surgery that
I have in the market.
I expect this week to be another big-time
great trading week. The commercials are still wildly short, and I'm thinking
this thing could break to the downside hard at any time. I only trade the
direction the market is actually moving at any given time, but the factors I
have been discussing, in here a bit and previously at length with the members,
still have me thinking the cyclical bull is near an end and the secular bear
may rear up again. Study your cycles and you'll see exactly why I am watching
for this.
Add in options expensing, oil at $100 or even $200 if Iran (perhaps
in conjunction with Venezuela?) acts up, and rates on the edge of backing up,
and it could get ugly very quickly. Watch those treasuries, as the sharp
sell-off is very scary. They came in at the last minute to 'save it', but if
they dump that 30%-40% of treasury holdings in Caribbean offshore hedge funds
it could start a repatriation that could bring the whole house of cards down. I
have to wonder, with what all the metals are doing...
The next
commentary will be next weekend's edition, posted by Sunday evening, February
12, 2006.
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