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 August
13, 2006 Commentary (weekend edition)-
That was
quite a week. The Fed really surprised me, since I thought they would keep
raising. I'm not saying I think they should have, only that if you play a
monetary game like they do, you get forced to work with a big hammer to do
everything. That sometimes forces them to do things that may not make sense, at
least make sense to me. Let me give one rudimentary and oversimplified
example.
The basis for the Fed raising rates to curb inflation is that too
much money (too many people) is chasing too few goods. The economy is 'hot'.
This leads to 'bidding up' the price, and hence inflation. We won't even get
into the concept of inflation actually being an inflation of the money supply,
which 'reprices' goods higher because the dollars are worth less. So, raise
rates and you cool the economy, and people chase the goods less. So far, so
good.
Now what about if inflation is caused not by competition for
limited goods and services, but by rising petroleum prices. Keep in mind that
crude supplies not only a huge part of our energy needs, but is also the base
product for plastic, pesticides, and a host of other products we use in large
quantity. And what if petroleum products are rising not because of demand,
which is what they say, but because it is a limited, controlled market. If you
think crude is a 'free market', just try to open your own oil company and see
what happens.
The Fed now sees this immense trickle down inflation in prices
because crude is in essentially everything. Don't believe what you hear about
how little of GDP is dependent on crude nowadays, as I feel that is an
immensely misleading statistic. Now they raise rates to cool the competition
for limited goods. Wait, the problem is no reasonable source of energy, at
least commensurate with what the system was based on as it developed. So, when
incredible amounts of money leaves the country for crude, and the trade deficit
widens, the Fed raises rates to cool the economy. What?
The economy
is getting pounded by the higher energy prices. The average Joe, of which I
know many, is getting killed. Now you raise his or her mortgage, car payment,
credit card payments, etc., and this is good? The inflation has nothing to do
with a strong economy, it has to do with ridiculous energy prices. It also has
to do with inflating dollars like crazy. Wait, increasing the money supply
while rates are going up? Isn't that an oxymoron? Hmmm. But the other side of
the coin? Lower rates to compensate for the increase in energy prices
not due to competition for energy? Yep, and you basically 'monetize' the
energy prices and they will skyrocket.
So, is this a no win situation? In my
opinion, yes. You can't do this kind of work with a big hammer. In fact, I
don't think you can use a hammer at all. But the Fed only has a big hammer, and
they must apply it in all situations (yes, this is an oversimplification, but
not by much, again in my opinion). We need a reliable energy source that is
priced in line with what the system is that we have built up. To make matters
worse, we need not just energy, but crude, for those plastics and pesticides
and all that other stuff we have become 'dependent' on. There may be answers to
all this, but none are easy or fast. In my opinion, we could be headed for some
tough times if we don't 'get on the stick' here.
Let me make one 'business' comment,
and then we'll get to some charts. I want to thank everyone who ordered the
book set since I've been 'back'. Even though it's a little 'artificial' to get
a small flurry of orders after a good-sized break, it always makes me feel good
to see my work is so desired and appreciated. I usually get some spectacular
feedback after the books are received, and that just adds to how good I feel
about the work I do with this project. If I didn't feel that I was truly
helping other traders reach their goals then I wouldn't keep doing this. So,
thanks again to all the recent buyers. With the books in hand, you now know why
I work so hard to bring this material to you.
Let's get started on the charts.
I'll work from last weeks Jim's Chart of the Week, but to save a chart I'll
just show it where it is currently.
The last arrow shows where I posted the chart
last weekend. I wanted to see how the NDX.X handled that area. There is a major
set coming up from below, and a set showing a likely area for a launch down
through that key set's lower parallel. The NDX.X has rolled off the area, but
with the Fed day spike, it is more just marking time so far. The Fed spike
brought it right back up to that line area, where it faded right off.
Notice the
wedge it has now formed with the two key lines. It's basically playing line
ping-pong, and a big decision has to be made soon. I could have used this for
this week's chart of the week, given how it is coiling right in a decision
area, but I chose gold instead (make sure you look at that pattern in silver,
and at copper, too). So, although my area of interest has held and brought
about some selling, so far it is more coiling than selling. Sometimes it takes
time. One observation I can throw out here: I frequently will see this kind of
action when the area of interest in 'opposed' by a much bigger area in the
opposite direction. Watch this one closely, and be patient.
Let's follow
up on the 10-year index.
Count back five bars here and you can see
where this was last weekend, when I showed the two areas I was watching (or
just go back to last week's
commentary). The 10-year index has bounced right off the upper area,
and has closed strong. Take a look at the weekly bars.
Will it
sustain the upmove? I don't know. Watch the 'trend continuation retracement
areas' that I am always discussing, do some lines, and see how it unfolds. It
is interesting that it did react dead off the area I pointed out last week.
Based on how this issue behaves, though (look back at previous reversal areas),
I wouldn't be surprised if it rolled back down to 'test' this multiple times.
It may not even sustain a move up here. All I can do is watch areas of
interest, and act on the price action when I feel the odds give me an edge.
This one is key, though, so watch it closely. (I watch the 10-year electronic
futures for trading, the 'ZN.')
Let's look at the Russell mini, as I promised
last week, on the 3-minute timeframe.
This action is shortly after the Fed
announcement, which can be clearly seen on the chart. They gun it up and then
sell it off. There was actually some great setups right in there, but I chose
to show this one instead. Please understand I can barely scratch the surface in
terms of what I see and how I built my areas. The nature of this column is that
I can only show a small amount or it would take me all day and take up way too
much space. As it is it takes me about four hours to do the commentary.
So, they gap
it up, and as soon as it starts to roll I 'lock' in this set, right after that
first arrow. I am watching the area of the lower parallel, in that .786/.886
zone. 'Context' plays a big
role here, but that is outside the scope of what I have time for here. And what
if it turns straight up here and blows the set out? No harm, no foul. This one
scenario of several I am watching goes in the can, and I look at one of the
other possibilities. If it does set up, then I have a framework and a possible
trade premise.
Let's move forward and see what happens from here.
I added on a sliding parallel in red. The MR
rolls right down to the area in a 'pseudo-ABCD' with the small BC leg right
around that median line, and turns on a dime. This is a primo setup for me, and
had a clean, clear entry
trigger in the lower timeframe. Notice the small reaction at the median
line? Now, where am I watching at this point? Well, the upper division line
(not shown, see next chart), and the upper parallel. But for those that have
the book set, you already see the pattern shaping up, and you know the
'context', so you likely also know why the upper division line is particularly
interesting to me here.
I'll add a few things onto the chart, and we'll move
ahead and see what happened next.
The .886 retracement area hit right on that
upper division line, and a pattern completed right there, with 'context'. The
entry trigger was classic, textbook Kane Trading methodology. The MR sold off
right back to that lower parallel. But look at the price action at this point.
Something is going on that the larger 'context' supports. This is something I
cover in detail in the mentorships, as it can really tip me off to upcoming
possible setups. Do you see the pattern?
I'll highlight the pattern, add on
a retracement, put some offset lines on there, clean up the chart a little, and
move forward quite a bit. This is awesome.
The arrow shows the completion point of the
pattern we were looking at. The MR ran down to that lower parallel, and bounced
up in an ABCD, right to a .382 retracement off the pattern completion point.
Also notice that the move, shown with my offset lines, was just about exactly
the amount of the spacing between the parallels (or median line) and the
division lines. Another coincidence, I'm sure?
The MR then took out the parallel,
as I suspected it would, and flushed nicely. Do the lower warning lines and
you'll see how it stopped dead on them. The MR dropped over twenty-two points
off the pattern at the arrow, with several potential opportunities to play this
as one trade, or in sections. This is classic, quintessential Kane Trading
methodology here, and is the type of thing I sit endless hours just waiting
for. And when I catch a runner, my style is to ride it as long as possible, not
to take anything off at a 'profit target' (which all my long-term readers know
I don't use, at all), as I explain in Kane Trading on: Trade
Management.
I hope this example was useful. I am serious when I say
that I only scratched the surface with what the methodology has to show on
this. I didn't look at 'context' or filtering, timeframe analysis, or entry
techniques. I didn't get into price action, anything detailed about the median
line sets or offsets, nor any trade management in order to attempt to stay with
this trade. I didn't discuss the concepts about the setup or behavior at that
lower parallel, which isn't in any of the books, but is discussed in detail in
the mentorships. The point is,
I want everyone to understand that I can only show a limited amount of material
in here, and only in so much detail. If you want more, you'll have to get the
books. This isn't a sales promo,
I just want to be up front and honest about it, and make it clear there is just
way too much to the methodology to show it all in a once a week
commentary.
As I close, let me mention that in a few weeks, probably in early
September, I will update the mentorship page a bit, and perhaps add a
'sub-page' link for the accommodations and place of mentoring, which has
changed. I think it would be best just to link a page for that, and explain it
all there. It's all part of the changes I mentioned, and it will all be clear
shortly. I will also get to some updates and 'stories' at that time, as I
mentioned. I'm making some lifestyle changes, as I alluded to, and they will
play into the mentorship program in a minor (moderate?) way. I know, I'm
playing all this up so much, with all this mystery, and it really isn't that
big of a deal. I just haven't hammered all the details out yet, or done the
page updates, so it's not time yet to explain it. Soon, though.
The next
commentary will be next weekend's edition, posted by Sunday evening, August 20,
2006.
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