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 June 4,
2006 Commentary (weekend edition)-
You would
think I'd be used to this by now, but every year it seems I'm not. They 'sell
in May and go away'. But I'm not referring to the 'pros', or floor traders, or
funds, or any of the like. I'm talking about 'retail'. The people like you and
I. My website traffic slows, the books sales slow, the e-mails drop off,
sometimes to the point where I just sit around hoping I'll get a SPAM. (I'm
joking, again, for effect. I wonder if there will ever come a time when I don't
have to be so defensive about my humor that I have to say this all the time?
Perhaps if 99 out of 100 'get' my humor, and 1 (who doesn't even have the book
set) comments on a forum somewhere that I'm an egomaniac, I should not take
that too seriously?)
Now, it's all well and good that 'they' leave for the
Hamptons for the summer, but retail? When the trading is as awesome as I ever
recall seeing? I just don't get that, and I never will. If you are working hard
to make this your profession, working at it full time, night and day, and the
summer comes, without even assessing the action, you leave, and come back
months later? I wish I was in a position to be that cavalier with my career.
I'm not in any way putting anyone down, I'm simply trying to understand why the
small, off floor pros or aspiring pros leave when the trading action is simply
great. If you have any insight on that one, feel free to send me an
e-mail.
I will start with last week's Jim's Chart of the Week.
I thought I might be a bit premature showing
this one, as I expected it may take a bit of time to get to this area. On the
other hand, it was moving up fast, and had moved down fast, so I didn't want to
have it hit the area, and I was too late in pointing the area out. I was really
hoping it would pull back into an ABCD before it hit the line. Little did I
know what was coming...
Let's fast forward to today, with some additional work
on the chart.
The S&P pulled right back, and then
started up, forming this near perfect ABCD, coming together right at that
median line. If you draw in your own division line, you will see the ABCD is
centered right around that. I showed two basic 'sub-groupings' for this. Of
course, this is only my framework, but the idea is clear. The 'context' is the real issue
here.
I chose this one last week because of the 'context', hoping
for some good discussion. I will drop some ideas, but the reader will have to
ponder these, and do the follow up work. The move down looks impulsive. So far,
this move up looks corrective. The issue is that we have been in an uptrend, a
'bull' market here for well over three years. My personal belief is that it is
likely a cyclical bull that is overdue to end, but I don't trade off that. I
only trade the setups. I don't try to calls tops or bottoms on any timeframe.
That leads me to some various possible scenarios here.
The first is,
this may be a BC leg of a bigger ABCD. Everyone knows I love ABCD's in BC legs
of ABCD's, for obvious reasons. This is in line with the bigger trend. It also
could be 'wave 3' of the next major leg up here, and the correction just didn't
have a corrective shape or structure. This is also in line with the uptrend. If
so, this area here won't be respected. Or, this could be 'wave 2' (of wave 1 or
an AB leg) in the start of a new bear market, or simply a much larger
correction. That fights the uptrend, and attempts to call the top in the
uptrend. That doesn't preclude short trades, it only means I am not creating
longer-term premises that are based on that scenario. Shorts, and what I
suspect that may do, must be based on lower timeframe, less extensive downward
scenarios, at least until the clues say the trend, on the weekly timeframe, has
changed.
No matter what the market is going to do here, this spot surely is
of great significance to me, and it is appearing across the board, in many
indices and issues. Now I watch the price action, and make my decision based on
what it tells me about this area. Also, in cases like this, where the area is
so critical and obvious, one thing I see a lot, and watch for, is the 'stab
fake' through the area, and then the strong reversal. This is a trap in the
making, and I can't imagine them passing it up. Some very good trading is
likely right at hand, in my opinion.
Let's move on to something totally different.
Let's follow up on beans.
I didn't want to do any more with the current
market than what I just did, to avoid the trap of doing market coverage instead
of focusing on showing various aspects of my methodology. Hence, I will spend
the rest of the time on some follow up in the beans. I chose this one because,
on the surface, it didn't 'work' as many perhaps were expecting. Trading is
dynamic, and although I can choose to just trade those that react exactly as
expected, and there are plenty of them, I like to 'work' some that do other
things with my areas.
Recall on this one I was watching the area
where the trendline and median line lower parallel came together. In brief, the
'context' was a big ABCD correction, set up to 'test' what looked like a
potential key low. This area of interest was perhaps a median line lower
parallel 'wave 2' 'test' of that bigger 'test'. That's a lot of testing, but it
was a scenario I was watching. As you can see, beans didn't 'see' the area to
any great extent, and drifted along the trendline, below the parallel. It then
exploded. Oops, missed that one, eh? It happens, right? Many times it does. And
many times the price action tells me otherwise.
Let's drop to a 15-minute chart and
look at that.
The arrow shows the approximate area I was
first watching. You can clearly see beans couldn't care less about that spot.
No hint of an entry trigger. No trigger, no trade. Next. But I kept watching.
Beans went down, and then burst above that trendline (this is not the
same trendline as on the daily chart). I'm triggered, right? Based on what
potential trade area (PTA)? What premise? I wasn't looking to trade right
there, at least not until I have some premise.
Let's zoom in a bit, and I'll add
some things onto the chart.
I noticed a few things here. Beans had moved
down in a 5 wave sequence, albeit a slightly choppy one. I added on a .618
price projection of 'wave 1', and a 1.618 external retracement of the last
thrust down i.e. of 'wave 4'. I did this after the fact, not
before.
I was not trying to form a trade premise right there, I was seeing
how harmonic this area was that beans were launching off of. I did a lot more,
but this is a basic idea of what I do to see if this area was harmonic, in my
eyes, or not. So far I'm just playing around. My premise was that this 'test'
was deeper than I expected, but given the size of the layout and such, this is
not unexpected. Because it didn't 'test' off the spot I thought was most
probable, or better termed, the spot I liked the best, doesn't invalidate the
entire concept of this being a test. But here's what caught my eye. Look at
what is happening right at the arrow.
Let's drop down to a 5-minute chart and look
at this.
Beans thrust through this line, and then
pulled back in an ABCD at a tight grouping. It then triggered right off the
area. Soy meal also had the same pattern. Now I have something with some
substance I can work with. Now I have price action clues that not only support
my premise, they give me an area to get in on with a tight stop, and the chance
to see, right away, if the 'pattern trigger' is going to play out. If this is
what I think it is, I expect quick and decisive action.
I'm not
saying I didn't have any kind of a decent PTA setup, it's just that I didn't
have one like I usually prefer. I had the same premise, just not as solid of a
PTA. In cases like this I may not trade right off the PTA, but wait for
something like this, fully accepting I may miss the trade if I don't get it.
The trade off is worth it to me. As you can see, beans and meal just exploded.
The move in meal is just incredible. My trading isn't, and never will be,
pre-programmed or without thinking. It's dynamic, and discretionary, within set
guidelines, using an extensive skill set. I hope I was able to show a small
fraction of that process here today. See, isn't that better than all current
market coverage?
The next commentary will be next weekend's edition, posted by
Sunday evening, June 11, 2006.
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