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 March
12, 2006 Commentary (weekend edition)-
What a week
that was for trading, in my opinion. The Russell mini broke all my own mental
records for how fantastic it can trade. I was just blown away by the number of
smooth, trending moves coming right off my areas. I know not everyone is a mini
addict like me, but I sure like that thing.
As far as the
rest of the market, things are really heating up. Rates are moving, and if you
go back and look at that setup for the 10-year that I showed you can see the
move still playing out. The currencies are moving off areas of interest, as are
the metals. The intermarket dynamics are just fantastic in here. Take a look at
the Yen, for example (talk about patterns and setups!), and today's topic,
gold. The indices are doing some interesting things, as you can see from the
chart of the week on the SOX. What happens at this area will tell me a
lot.
Let me discuss one item of business before we begin. It actually
won't be much of an item, since I didn't get it fully ready before today's
commentary. I hope to 'launch' this sometime this week, perhaps by the early
part of the week. I will update the What's New page as soon as I do
this, and then do a brief description in next weekend's commentary. If you want
to see this before then, keep checking back on the What's New page, and if I get
this wrapped up as anticipated, I'll get it posted there. It's not any big deal
or anything, but it is a completely request driven offering, so for those that
have been asking me about this, it will be something quite useful.
Let's start
with last week's Jim's Chart of the Week, in gold.
Let's first review how we got to this point.
The first arrow shows an ABCD that came in right at an obvious uptrendline,
with two key lines built around the ABCD itself (I deleted off the rest of the
set lines, for clarity). The details of how I constructed the sets are in Kane Trading on: Median Line and
Fibonacci Synergy. There were also Fib groupings and some other things
there that I didn't show with this framework, obviously.
Gold jumps
right off the area, and I create the 'adjusted' set on this chart. Price heads
straight for that median line upper parallel at the second arrow, which also is
dead on a .786 retracement. I added this on to some of the charts we will look
at shortly. Now, am I watching here as I make management decisions for the long
setup? Of course I am. This is an area I need to take into consideration. It is
not a 'profit target', as we all know by now I don't use those. It is an 'area
of interest', though, for sure.
The next spot to watch? That trendline and
median line intersection area. I wanted to put another arrow on the chart, and
in fact I did, and then I deleted it, at that lower parallel, as the next spot
I was watching, since I suspected this area would not hold. I didn't want to
confuse the issue too much, so I stuck just with this. Nonetheless, we can
still do some solid work with what we have, and cover some good topics, as I
hoped we would be able to.
Let's see what gold did from here.
Gold reacted slightly to the area, but
otherwise dropped right through to the area of that lower parallel, and started
to react there. This is something I was watching on the lower timeframes, as
the detail is not all that visible in this timeframe. One thing is clear at
this point, though, and that is that gold gave me information when it dropped
through that area so easily.
I'll add some things onto the chart, and we'll discuss
those.
I added that .786 retracement onto the chart
at that second arrow, just to show how nicely that was seen. I also added a key
.382 retracement of this entire, structured pullback. Why do I say 'key'? It is
anchored off a 'major', obvious swing point. I also added in a dotted line,
which is the first division line below a lower parallel for a very key, larger
set that I have on my working charts. I deleted off the rest of the set for
clarity. I'll leave it as an exercise for the reader to duplicate that
one.
Notice, too, that this area is falling in line with a much larger
ABCD pattern here in gold. Now, from the perspective of this 'context', is this
upcoming area critical for me? You bet it is. What I did with any previous play
was decided in the management phase. This is now something new that I
absolutely must be watching. If this area doesn't hold, that could have major
implications for gold, in my opinion. This would be an 'early' ABCD, and the
.447 area and some additional lines are just below. The areas I am watching are
clear. Take a look at the XAU in here for some added clarity.
Let's get
back to the topic for today, above and beyond this new area of interest that is
shaping up, and that is the price action around that median line area I
highlighted last week. I'll drop down to the 62-minute chart.
The first arrow shows the area of the ABCD
completion, where my potential trade area (PTA) was. Notice the interactions
around that median line, highlighted with the second arrow. The reaction at
that upper parallel and .786 retracement area is a lot clearer with this view,
by that third arrow. No doubt I wanted to be watching the reaction there. The
fourth arrow shows the area I wanted to watch, as shown in last week's chart of
the week. Gold sees the line, and starts to react, although the move to the
area was very harsh. Notice how this area has a lot of 'congestion' to the
left, all clustering around that previous 'battle' with that median
line.
Let me add something very crucial in here onto the chart.
I added that daily trendline onto the chart.
Now, can you see why I pointed this spot out? Is this an important area for me
to be watching? Sometimes the areas are just right there, if I know what I want
to use to construct them. Keep in mind, I am not saying what I am doing here,
play-wise, as that is 'outside the scope of what we are doing here'. I am
trying to show how I look for key areas to watch, and how I read the price
action in those areas to give me clues to use in my trade premises. My trade
premise may not be your trade premise, but clues are clues, regardless.
Let's see
what happened from here.
Gold dropped like a rock, right thought the
area. Did that give me some useful information? Notice the bounce right after
that? Do a .382 retracement off the top here and see where it rolled over. As
close to dead off that .382 as one can get in the real world. Did that tell me
anything?
Now gold sits in this confluence area with two lines and a major
.382 retracement. How about adding in the ABCD numbers, lines from the pattern,
and so on? Gold started to react here a bit, but this is a lower timeframe, and
it's too early to see what it is doing yet. Put all the work together, and see
where the areas are for this thing. This is going to be very, very interesting,
and very telling, in my opinion.
As I close I want to say that if
there ever was a time to do some hardcore intermarket analysis, this is it. I
suspect rates may be headed up big-time in here, and that will have a serious
effect on everything, across the board. Now, I don't trade off what I suspect,
I trade off my setups, with entry triggers. But, I do put together various
scenarios based on my intermarket analysis, and I throw in a touch of
'fundamentals' when I look at the higher timeframe key intermarket components,
which I have said time and again are the currencies, treasuries, precious
metals, and energy, and perhaps the major indices.
Let me add
that the commercials are still holding a big short position, dead opposite the
'small speculators', also known as 'the wrong way crowd'. The Industrials still
have not even come close to confirming the new highs in the Transports, and
this is a very ominous sign. Breadth has been deteriorating for some time, and
is getting much worse. Now, we all know I don't pick tops or bottoms, and my
methodology is a 'go with the flow until the flows stops going' style, so I
simply don't even take shots at picking ends of trends (which is totally
different than playing counter-trend on a lower timeframe, within the 'context'
of the trend, knowing that is specifically what I am doing).
On the other
hand, I also look at statistically probable moves, and factor that into my
scenarios and trade premises, as far as expected possible moves. I discussed
this in Kane Trading on: Multiple
Timeframes and 'Context'. This 'bull' market, which I am of the opinion
is most likely a cyclical bull market in a secular bear trend, is statistically
old and tired. The internals are showing all the typical signs they do at the
end of a cyclical bull market. The commercials are positioned exactly as I
would expect at the end of a cyclical bull market, as are the small
speculators. And the action has a topping look to it to me.
Now, none of
this has me shorting anything on the daily timeframe that is going up, but I am
factoring this into my own plans as far as longer-term exposure, say for
'retirement' accounts and position trading, and as far as my premises as things
unfold if this end of the cyclical bull scenario starts to play out. And if it
doesn't, I keep with the flow. I just want to get other possible scenarios out
there for everyone to consider.
Do some studies on the approximate 16-18 year
cycles the market has, and look at the period from '66 to '82, and see where in
that period we may be now, and what happened about that time. After the DOW
lost over 37%, it went on to set new all-time highs. All-time highs. It
then got a haircut to the tune of over 46% from the new all-time highs. How
bullish do you think people were at those new all-time highs? This all happened
in a period close to where we sit right now in this possible cycle. Look over
the S&P at this time, which set two major new all-time highs and got
slammed just about 50% off the second one, and you'll see how brutal this was.
Just something worth keeping an eye on, as one of many possible
scenarios.
The next commentary will be next weekend's edition,
posted by Sunday evening, March 19, 2006.
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