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 October
15, 2006 Commentary (weekend edition)-
Well, I'll do
the best I can to do a commentary here today, given the circumstances. I have
experienced a huge family tragedy, and I will be a long time recovering. I'd
like to say I'm being altruistic here, always thinking of my readers, but truth
be told, I'm more likely writing today just as a distraction for myself more
than to make sure everyone out there is getting my all.
I will try to
do another commentary next weekend, but after that I may miss one or two, or
whatever I need to, to attend to some pressing matters that require my time.
I'll do the best that I can, so keep checking back, and I'll try to keep
everyone informed. As I mentioned in the note I added to the last commentary,
if I am not personally able to ship a book order at any given time I will have
someone monitoring for sales, so feel free to order if you want, as they will
get shipped.
For today I want to go back to that LC setup and discuss what has
happened since I updated it as the chart of the week. I specifically chose this
one because I highly suspected it was going to do exactly what it did. And what
it did is something I watch for, as I have said many times in here, and I try
to use this to my advantage. And what did it do? Take a look at the recent work
I showed in crude for a great example. Let's look at how this one started for
me.
I
was assessing the 'context'
on this one, and I just didn't like it all that much. Something bothered me,
but I just couldn't put it into words. I was talking with my 'hedge fund guy'
and I told him I really, really was bothered by the layout. The specific setup
was nice, but something in the 'context' bothered me, and I felt the area
likely wouldn't hold. It's just experience and seeing a lot of 'context', from
the point of view of my methodology, that had me seeing something there. Since
I couldn't explain exactly what I didn't like I used a line from the movie 'The
Matrix' to explain this in my conversation. I said there is something there,
'like a splinter in my mind'.
Now, why not just stand aside, or get ready
for the fade? Sometimes I do, but I usually reserve that for times when the
setup is nice, but the 'context' is saying the opposite. Granted, this is a bit
of an oversimplification of what I do, but it covers the basic idea. Here, most
everything looked good, but overall I just didn't like the bullish prospects
here at this point. So, my plan would usually be to play the long if I get a
nice trigger, and then watch
the price action behavior very closely. I do not want to see corrective
action off the area, as I did with crude. That would have me thinking about
closing, and then playing the corrective pattern for the break.
Let's look at
a series of charts, keeping in mind what I showed with crude. Please understand
that I can only show the basic concepts here, given there are a slew of
aspects, behaviors, and areas I watch for clues as things unfold, and that is
far beyond the scope of what can be done in here. I focus heavily on this in
the mentorships. I am not trying to 'sell' any mentorships by saying that, I
simply want to point out that there are much higher levels that this work can
be taken to than what I can present here.
Here's the chart I posted two weeks ago, as
LC approached a key setup area I wanted to watch closely. This chart is the
October basis. I used this month because I had built the work on it, but the
time to move to the December basis was at hand.
Let's move to today, and the
December basis contract.
LC jumped nicely right off the area, and then
rolled right over and took the area right out. There is a lot to see on this
chart with regard to that, but the details really come to life on the lower
timeframes, where I would be doing my ongoing assessment.
I'll drop
down to a 47-minute chart (chosen so each bar has an equal amount of data), and
we'll assess what we see.
LC comes right off the area, as nicely as I
could ever ask for. It makes a nice move, then pulls back in an ABCD structure.
It then thrusts again. So far, so good. This is typical 'wave1, 2, and 3'
action. But something is unfolding that I want to watch very closely. You see,
every 'wave 3' that plays out must cross that area where it would roll over if
it was an ABCD (abc in Elliott terms). This is an area I want to keep an
eye on, especially if I have other supporting (synergistic) factors at that same
point.
Let me highlight what I am watching.
At this point I have no idea if this is an
ABCD (with an ABCD in the BC leg) or simply a 'wave 3' unfolding. Even if it is
a 'wave 3' I would still expect I may get a reaction, just so the market can
'fool as many people as possible at any given time'. I want to assess the area,
and then assess the reaction.
I'll add some Fibs, and some lines.
I added some key Fibs, and a critical .447
retracement off the high there. I added a 'crazy' trendline in there (go back
and see if you can see how I did this one, and why it was an obvious one to
me), and just the upper parallel of a modified Schiff median line set, for
clarity. A lot of factors were coming together right here. I expected a
reaction, but then I wanted to see this rocket through the area. Keep in mind
I've already gotten a long trigger off the main setup area. I am now assessing
what I think of the action so far, and what I think of this area for a fade
trade (going the opposite way) if this rolls over and doesn't start right back
up.
Let's move forward, and see what is happening.
I wanted to do this in two charts, but I only
have so much room in here. Look at what LC did. It dropped like a rock right
off the ABCD. That's not what I want to see if the bullish play is
acting 'right'. Sure, it can do anything, and then take off like a shot, but
from a probability standpoint this is not what I want to see. Next, LC
hits that lower parallel and bounces right up nicely. It then fails to take out
the swing-high it just set, and rolls right back down to that lower
parallel.
Sure, I could stick firmly to my stop and give it room to breathe,
but this is not the kind of action I want to see at all. In fact, I've already
had multiple triggers for the short side, if I wanted to fade the initial
setup. Recall my introductory discussion, and what I showed in crude. The
triggers don't decide on the trade, I decide on the trade. The
triggers give me my entry, if I have decided I want in off an area. The
main point here is that this looks on the verge of collapse here, and the
action is anything but bullish. It would be rare for me to stay with a play
like this, if I hadn't already went to the other side.
Let's see
what happens from here.
The LC gapped way down, and continued to sell
off from there. All this was dead off the ABCD, just like with crude. Many
times this one move off the area is the final gasp, and then it follows the
direction of the initial setup. Sometimes it does like crude and just keeps
going. Management and
'context' help me with this.
The lesson, though, is in reading the price action and
clues, and acting on that instead of being stubborn. I always look at various
scenarios, and incorporate the actual, unfolding price action into the various
possibilities. Unlike many pattern traders I am not at all wedded to any given
setup, assessment, or layout. My methodology points to areas I want to watch,
that I feel I can use for various premises that I think may give me an edge. I
am not trying to show that my setups are '95% accurate', or 99% accurate', or
anything like that. This allows me to focus on opportunity, not on proving the
superiority of my setups.
I really wanted to do this week's work on wheat, as it
reversed at an exact point I was watching, then took out a key line in a manner
that I watch for, and that started the really big explosion. The only reason I
chose LC was because I had it as the last chart of the week, and it did what I
suspected it might, giving me that teachable moment I strive for, and I didn't
want to leave everyone hanging on that as I went to another issue. Do the work
on wheat and see if you can discover what I was looking at. If nothing else
comes up I might do the example in that next week.
For this
week's chart of the week I went with the weekly chart on the Canadian dollar,
via the Canadian dollar index. This may take awhile to unfold. It is
particularly important to watch because the Canadian has run so far, and this
is one key area to see if it may keep running. Keep in mind this is a key
'commodity currency', and commodities are supposed to be dead now (think so?).
There are a few other areas below for the Canadian, but if it takes out the
ABCD area, that says something. I wanted to get this one on the table early so
that we can keep an eye on it.
The next commentary will be next weekend's
edition, posted by Sunday evening, October 22, 2006 (if all goes well for
me).
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