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 February
18, 2007 Commentary (weekend edition)-
The trading
action was just superb this week, again, in my opinion. Friday's action on the
Russell mini was just classic, textbook action for my methodology. I recall how
on Thursday after the market close I worked up my charts, setting up my
potential scenarios. One stood out clearly, and that was a big ABCD down to a
confluence of the pattern with multiple lines and a Fib grouping. One of the
things mentor students frequently mention to me is how they didn't realize one
aspect of my approach is to create several potential scenarios ahead of time,
and then see which, if any, unfold. That is integral to my methodology.
I have no
idea what will happen on any given day, I can only do my own, unique assessment
of what I feel the probabilities are for various scenarios, and do some
reward/risk calculations based on that. If none of my potential scenarios setup
and/or play out, well, that's trading. I am just trying to wait around and see
if one of them does set up, gives me what I want in the area as far as price
action and entry trigger, and
then I can work from there if I so choose. If nothing happens, or I get nothing
to go to work on, there's always the next potential setup to watch for.
Well, on
Friday the Russell went right to the area, with multiple shorter timeframe
setups for that move, and then hit the area, triggered beautifully, and went up
for the rest of the day. I love it when I have a highly favored setup amongst
my potential scenarios and the issue goes right to it, acts just like I would
like, and then just trends smoothly off it for an extended period. Do they all
work like that? Get real, only a small minority work like that. That's the best
case scenario, where things just fall together with the least amount of work.
It's just a lot of fun when they do, like a perfect day at the beach. And the
run up? Pattern after pattern after pattern on the lower timeframe. If you know
my methodology, take a look on say the 1-minute chart, for detail. Just
amazing.
Now, I got a lot of positive feedback on last week's commentary and
my anatomy of a trade approach, so I thought I would do a bit more in that
vein. I was going to do the Russell setup I just mentioned, but I wanted to
leave that for the readers to work with, and I want to mix things up for those
that aren't just short-term mini traders. It may be hard to believe, but there
are people out there that trade other issues and other timeframes. So, I
decided to show the crude setup and area I have been watching so closely. This
has been the chart of the week for the last two weeks, via the tracking stock
USO, and it will be the chart of the week again this week, using crude itself.
This should be an interesting and informative commentary.
I'll start
out with last week's chart of the week, in USO, with this last week's data
added on.
Last week I said, with regard to this layout:
"Make sure you look at the equivalent setup in crude, though, as that may be
much closer than USO.". I have a few sets I am watching. Part of this, I think,
is due to the slight differences between the futures contract and the tracking
stock, and some are due to my trying to show the futures without a way to bring
a continuous contract into the software I use for charts in here (that may
change at some point, though). The two do 'blend', though, as I hope you will
see by the time we finish. This is all something that is easy to cover if we
were sitting side by side and I could demonstrate on my working platform and
charts, but it is very difficult in here, limited as we are.
So, USO
bounced up a bit and then backed off, still shy of that overhead area. But
crude is at a more critical area now, and has done some very interesting
behavior. This is the type of thing I watch, for clues, and that is why I chose
it for this week's 'lesson'. Sometimes it is important to look at similar
things and come up with various assessments. Some examples are looking at the
SOX.X and the tracking stock, the SMH, the DOW Index and the DIA's, or gold
futures and GLD. Sometimes there will be some differences, and I like to keep
an eye on that, and do work on both charts.
Let's look at
crude, basis April, and hopefully you'll see what I am getting at.
Here is crude as of last weekend. I only
showed a key .618 retracement here, instead of the choices I showed with the
USO, because I want to look here, not just above. The median line upper
parallel is right here, and the slight overshoot is even in line with a sliding
parallel of that last overshoot. This paints an entirely different picture
here. I also have another sliding parallel above, and that looks to coincide
quite well with the USO upper parallel. So, perhaps, they aren't saying
different things to me, they are just saying the same thing in a slightly
different manner.
I also want to mention that this set isn't as 'clean' as I would
like because it was done on the front month contract, which is just recently
getting the liquidity. This should be done on a continuous contract for maximum
accuracy, but as I said, I can't do that in here (yet). I did the set as best
as I could, but there may be some slight variation with a similar set on the
continuous. Whatever variation there might be, it should be nominal and not
affect my point here at all.
Now that we see how crude was positioned, let's 'catch
up' to where it sits now.
Crude dropped right back down to that
division line, where it reacted, and now sits just about at the upper parallel.
Notice the previous reaction, too, near that division line, before the high was
set at that sliding parallel. The main thing I am wondering as I assess this as
it unfolds is, is this bearish price action as it rolls down, or are there
clues that tell me the upper parallel, and a potential short trade premise off
that parallel, may not be what crude has in mind?
Let's go to a 66-minute chart. As I
always say, you will likely get a lot better of a chart if you do an
appropriate tick chart, but I can't do those in here. As I said before about
continuous contracts, though, this too may change in here at some
point.
Crude pushes up one more time, and hits a
1.272 external retracement of the last pullback, where it starts to roll over.
This high here at the 1.272 is the high on the daily, at that smaller distance
sliding parallel. The interesting thing here is the set I have on there. It is
outside the scope of this commentary to explain exactly how I came up with this
set, and perhaps even if I was inclined to make an entire commentary out of
this I likely wouldn't, simply because it is material I generally only show to
mentor students one-on-one.
Regardless, you can experiment with sets yourself, as I
did when developing the methodology, and you will likely figure out my
reasoning here. And Kane Trading
on: Median Line and Fibonacci Synergy explains the majority of what I
do. Anyway, the set was in place by about the third week of January, and fully
'tested', by my standards, before the end of January. Now I want to see if
anything develops with regard to the set, or not.
Let's move ahead, and I'll show you
what jumped off the chart at me.
Crude rolled down in a beautiful, symmetrical
ABCD pattern, right to the
first lower outside division line. This was interesting to me for several
reasons. First, the first upper outside division line was 'seen' several times,
and second, look at the B and C points of the ABCD, by the arrows. The ABCD was
symmetrical around the median line, and the reversal points were right on the
inner division lines. Even if I didn't have the set until the CD leg had
started, I could have locked my set this way just based on that alone, and I
would have had wound up right here anyway.
Now, notice the 1.000 price
projection for the ABCD I also added on there. If I have a premise for this to
go down (recall back my offhand comment about crude prices a few weeks back),
then I want to see this area get taken out like it wasn't even there. If my
premise is that I think the line area overhead may go, hence possibly leading
to a 'pop' in the price, this is setting up as a launchpad for such a move. And
how do I form my premise? Usually that centers around my assessment of 'context'. As you can see, it's a
highly integrated and comprehensive methodology, with each piece critical to
the picture for me.
There was something else here that really caught my eye,
though. Let me add some additional Fibs onto the chart.
Wow, is that something. I added on all the
'standard', obvious Fibs on there. I don't 'curve fit', or pick obscure bar
highs or lows wherever I want so I get a grouping like this. These are right
off major, obvious swing points, and most numbers are the more well-known ones.
I even threw an expansion in there for fun, since this area is showing so much
'harmonicity' it is just
incredible. There were more things here than I have shown, but this is enough
to show you why this potential launchpad was a key spot for me to
watch.
Let's see what happened from here.
Crude reversed dead off the spot, and has
been going up ever since. It is fast approaching some critical areas. That is
obvious from the daily chart, and from some work I haven't shown on this chart
(that would need another entire commentary). Crude may have gotten to a 'wave
1' area here on this timeframe, and may work on something along the lines of a
'wave 2' in here. What it does will provide some clues for me. And those clues
will be clues for the higher timeframe lines we were looking at. Hence, this
week's chart of the week will show my look at that. But make sure you do your
own higher timeframe 'context' analysis, because, as I always say: 'Without
'context', you have nothing.'. Amazing, to me, how crude 'tipped its hand' on
that rollover off the upper parallel, with this pattern.
As I close,
keep a close eye on the indices this week, as they are all at a 'stretched'
extreme for the upper end of the range, at key areas and lines. This is in the
'context' of a strong uptrend, though, and I don't ever try to call the ends to
trend. I do play countertrend on lower timeframes under certain conditions, so,
like the crude example, I will be watching price clues to assess if I think the
trend has resumed back up now, or if a correction is underway.
Those
commercials are still wildly short, and I haven't gotten any signals to scale
in the gold play we have been watching. Cap'n B soothed the market, and rates
settled back, but do the chartwork... What the Euro does in here will tell me a
lot, so work those currencies like there is no tomorrow. Last weekend didn't
bring any surprises, as I thought it might, the news is 'all good', so for now,
everything is great, and the bulls still look like heroes and geniuses. But I
wouldn't get too complacent...
The next commentary will be next weekend's
edition, posted by Sunday evening, February 25, 2007.
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