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 August
20, 2006 Commentary (weekend edition)-
I tend to
think of myself as somewhat creative (or else how could I have come up with all
this material?), and I feel I express a reasonable level of creativity, or at
least a level of 'newness', when I write my column here. As I have mentioned
lately, I'm stuck in this rut with regard to the introduction of the column. In
that area, I'm a broken record, and I just can't break free from the rut. I
can't even see the top of the walls of the rut anymore. What do I mean? You'll
see. Here's my intro: Wow, what a week for trading!
I've
mentioned I'll probably just give up trying to say anything different. At this
point, I think I'll implement that plan. I'm just going to start every
commentary that way until something changes. And that may never happen. It's
funny how every summer I see the same thing: what I consider great trading
conditions on declining volume and declining website traffic and e-mails. And I
always find it odd. Given that I appeal to a very small core group of
professional traders and aspiring traders, you would think this group is far
too serious to take any significant time off, but that doesn't appear to be the
case. I only mention this so often because I, personally, find it hard to walk
away when the action is good. The old 'make hay while the sun shines'
philosophy. Well, enough said on that, let's get to work.
As I've also
said many times, I can only show a small amount of what I am doing on a given
layout in here. This really bothers me at times, because I'd love to explain
every last detail, but given the medium I have here it would take me the entire
week to put it together for one layout. That's one reason I like doing the
mentoring so much. I can
really dig in and show every last subtlety and nuance, in great detail. Today I
feel I am only showing perhaps 5% of all the details, since I show a chart and
discuss it a bit, and then on to the next chart. Even if I stayed with a single
series I still wouldn't be able to get a great deal deeper into the details.
Still, I have been told my commentary is quite detailed for a free column, so I
guess I have to just accept that this is the best I can do given the nature of
the medium.
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,
same as I did last week.
Here's the gold chart from last week's chart
of the week. The arrow shows the area of interest. My point here was that gold
was forming this '.618 wedge' and it was getting tighter and tighter. It was at
a key trendline, and a decision was imminent. Gold reacted a little to the
area, and then dropped right through. Go to a lower timeframe and you can
better see how it 'tested' the line and area from below, giving me a potential
short entry area for a short-term trade. There is a pattern (one I haven't
published) here, and, of course, a 'standard' ABCD if this continues down. What
is the 'context' here? That
tells me a lot about what areas I may have interest in. Look at silver and
copper, too, for some clues.
Let's follow up on the NDX.X.
So, what was my point with this one? Recall
we have been watching this for awhile, and the most recent interest was at the
last arrow. The NDX.X rolled down a bit off that area, but it just didn't drop.
Sometimes they do this and then go, but it is not the ideal situation. My book and members' archive readers
know I tend to be a bit 'jumpy' at times if things don't follow up as I expect.
In this case the 'context' had me on alert.
Since I am
making 'context' the theme for today, I will show some of this when we get to
the Russell. After you see that work think back to this chart. So, if the NDX.X
couldn't get going off that area, what is another logical scenario? It may
explode up, and if it takes that area out, it's a big deal. This is not to
mention the obvious trendlines everyone on the planet are watching in this
area, too. And that's just what the NDX.X does. This is why I say I sometimes
'fade' the areas. If I don't see the reaction and price action I expect, I
frequently look for lower timeframe clues and setups to get me on the other
side, in anticipation of the 'blowout' of the area. This is a classic
case.
Let's follow up on that 10-year index.
I'll start out with a quote from last week on
this one: "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." And what did it do?
The index went up right to a
.300/.382 confluence (do some line work, too), and dropped right down. Did this
surprise me even slightly? Even one iota? Of course not, it was exactly as I
expected. That's why I said to watch those 'trend continuation' retracements.
Now do an offset line from that high on the chart and put it below that lower
parallel. The various ways I do this are explained in detail in Kane Trading on: Median Line and
Fibonacci Synergy. The lower area is about to be 'tested', as is this
big set. What ultimately happens here is critical to all the markets.
And why do I say 'ultimately'? Because if we get a bounce here it isn't going
to be the whole story, as you know from my work.
Let's get to the MR, since I want
to keep with that for now, as I promised. I will have to show a lot without the
nice step-by-step interim charts I like so much, since we only have so much
room.
Here was a classic short setup from Monday. I
was watching a key downsloping set, with its upper warning line. The MR
completes a nice-looking ABCD, with a 'standard' set median line and a modified
Schiff median line set upper parallel all hitting an outrageously tight
grouping area composed of many key numbers. I also had a time symmetry factor
right at the line confluence.
This was a fantastic setup in my opinion.
Notice how the MR went a little bit past the area from a time standpoint, right
to the 1.272 time projection area. I don't try to get too unrealistic about the
potential trade area. This one was extremely precise, and it hit it closer than
I could realistically ask for. This is classic, textbook Kane Trading
methodology. But what's my point? You know it surely isn't to show an after the
fact setup and brag how good my methodology is. Ah, it must be 'context', since
that's the theme for today.
Let's see what happened from here first.
The MR didn't have any further to go. This
was surely a nice move, and all I could ask for to get me started. The issue
becomes one of whether or not I would hold this 'overnight' or not. Sometimes a
call like that has little to do with just the chart layout. Sometimes I
consider 'catalysts'. The MR gapped up hard the next morning, and, in my
opinion, not coincidentally, to just over the previous PTA, which it 'tested' a
few times from above and then exploded.
So, what was the catalyst? A premarket
report, in this case the old PPI. But do I simply never hold a higher timeframe
play through a report? After all, this was not a 'daytrade' (or in my
terminology, an 'intraday swing trade'), but was based on a higher timeframe
than my usual 3-minute intraday timeframe. Well, sometimes I look to play the
actual traded timeframe, sometimes I use it for 'bias' for 3-minute plays, and
sometimes I am looking at both. One factor I use to help me decide on my
various trade premises is the 'context'. Before we get into that, pull up a
chart with the 'all sessions' data on this, perhaps a 1-minute or tick chart,
and you'll see just what happened when the report hit.
Let's look at
a 135-minute chart. I'll put quite a bit of data on the chart so I can show
this.
The arrow shows where the MR exploded from.
Notice a few things. The MR is at the bottom of a very extensive trading range.
To go short this far down from the recent high at the range top on such a small
ABCD is not a high-probability setup, if the intention is for a range break.
Although I do use patterns for this exact purpose, this one was not within the
guidelines of how I do that. One would be shorting right on support here. Good
for a much lower timeframe trade perhaps, but not on the 'traded timeframe'.
So, it had a key report as it sold down to the range bottom, and had already
expended quite a bit of energy off the last setup. But there's more...
Let's go with
a bonus chart today, and look at the Russell index on this one, on the daily
timeframe.
The arrow shows the area we are looking at.
Not only is this at a range bottom, this is also the low for the year area, and
low for the entire move down from the yearly high, and for many issues, the
all-time high. Notice all the 'support' here, especially on the left side of
the chart. This has significance to me because I know many are watching it, and
it will surely trigger program trading, and all sorts of games.
I like to
trade where not much of great notice is going on. I like to be the mosquito
sneaking up on the sleeping lion for a very quick meal, and then off I go, very
quickly. I don't go up to him, give him a swift kick and wake him up, and then
yell 'Hey, Lion, here's how it's going to be. I'm coming in for a meal any time
I want, in any quantity. And I'll be back often. And you know what else? That's
just the way it's going to be, you got it? So you better get used to it.' That
would be follow by 'Roar', splat. Remember when I wrote that story up in a
previous commentary? You get the point. I want to work where others don't see
much going on. The 'context' here told me a big bounce was certainly a
possibility here, and that any short on the higher timeframe would be 'shorting
on support'.
One of the main uses for me with 'context', as I explain in Kane Trading on: Multiple Timeframes and
'Context', is in filtering. I use the 'context' to try to formulate
various trading premises that make sense based on what I see before me. To help
me assess the 'odds'. For me it isn't just about the setups, the potential
trade area (PTA). That's why I say I only put 10%-20% of my energy and work
into the PTA, while most others are 95%, or even 99%. The setup is critical,
don't get me wrong, but it is only one rather small part in the entire process
that makes up a complete, balanced 'Trading Plan'.
So, as I
close, you can see that the action is not only just incredible, but it is also
filled with many critical decisions that are coming to their do or die points.
Take a look at this week's chart of the week on crude. That is a remarkable
confluence of lines, patterns (there are several), and Fibs. This has also
dropped below a big, obvious trendline. Will it 'test' that from below? Or will
this amazing area hold? I don't know. All I know is that this is a critical
area, and I will watch the price action and the potential entry triggers, and let the market
guide me. Notice the position of rates, as crude sets up here? Not only that,
but just as the market 'explodes'. I must admit, crude is painting a picture of
a big drop from here. I wonder what that is telling us?
The next
commentary will be next weekend's edition, posted by Sunday evening, August 27,
2006.
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