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 February
25, 2007 Commentary (weekend edition)-
The action
was incredible again this week, in my opinion. And I'll just keep saying that
as long as I feel it is the case. The Russell is smoking off at new all-time
highs, as are many, many issues. The commodities are moving all over the place,
with the grains just wild. The 'musical chairs' race by huge, huge funds that,
in total are way bigger than the futures markets they play (again, in my
opinion), keep running things up in this or that area, only to race to the
chairs when the music stops. And then they start all over again. I kind of feel
bad that this runs up actual prices paid for food, fuel, building supplies,
etc. for the average middle-class person, but that is the game that has
developed, and the powers that be have no desire to even address it. Again,
this is just my interpretation of what is happening, and I'm sure many disagree
with it.
Today I am going to continue the theme with crude and USO. It is a
challenge, for sure, to try to come up with something for every commentary that
I feel is high-quality from the standpoint of presenting concepts and critical
thinking skills. As I said recently, I could just slap together a working setup
from the past week and leave it at that. I'm always trying to show something in
here that delves into some additional skills beyond just the setup.
As I have said many times, the
setup is only about 10-20% of my comprehensive 'Trading Plan'. Hence, I put in
a lot of extra time trying to come up with various themes that may convey some
different aspects of my methodology, like price action. It has gotten so that
it takes me as long to come up with and frame out an idea as the entire
write-up and chartwork take. And the medium I am constrained to in here is so
slow and cumbersome, it can be quite frustrating. But anything for my
readers...
I'll start out with last week's chart of the week, in
crude.
Now, what I am watching here is how crude,
and the tracking stock USO, handle this 'overhead' area. If some type of major
bottom is in, I would expect to see these handle the obvious overhead areas
with little difficulty. I actually prefer to see reactions and then have the
areas taken out. I want to see the reactions because that tells me my areas are
being 'seen', and so I feel I am watching spots where things are
happening.
If the spots I watch aren't being 'seen' I get wary of
the issue. What I am doing is using 'context' to given me direction, and then
instead of now using the setup 'normally' I am watching them as they set up
opposite to the direction I am currently seeing. I can even do this to assess
what the possible direction may be on a given timeframe by how the various
setups are handled. Interesting approach, eh? As I have said many times, a
setup is not just a setup, and that's the end of the story. To me, a setup must
be evaluated with the 'context', what I call 'context'
filtering, and then I can decide how to use it as a treasure trove of
information.
Let's move ahead to today.
If you look closely here, or drop down to a
lower timeframe, you can see crude reacted a bit at that upper parallel, and
now it sits right at the sliding parallel, where it reacted a small amount.
This is now 'crunch time', the time crude has to decide on this critical area.
If the flow is still down, this is a very important area for that trend to
reassert itself. Sure, it could spike over and then start back down, in fact,
it could do anything. But I'm looking at probabilities based on my years and
years of work. Maybe your work shows you something different. For me, this is a
key spot to gather clues and information.
Let's drop down to that 66-minute
chart from last week, and follow up on that. I'll start with where we left off
last week.
Last week I showed how crude has first
'tested' the area of that median line set upper parallel, only to back off in
the form of a fantastic-looking ABCD, with a super-tight Fib
grouping right at a line. This was only a framework, albeit a solid one. It
then took off like a rocket, in true 'take out the area' launchpad
style.
Let's move to today, and see what happened from there.
Crude has followed through nicely, but two
things jump out at me. First, the week ended where we just saw on the daily
chart, right back at the critical area. If a launchpad like this ABCD, which
produced this strong of a reaction can't get it over the area, that's
significant. Second, look at that gap down to start the week. Closes strong and
opens super-weak, it seems, right before it goes essentially straight up. Look
like a shakeout? It does to me.
I'll add on the data from outside the
'regular' trading hours, and we'll assess the action as it headed towards the
regular open. Again, tick charts are much better for this, so do the
work.
I showed the C and D points of the ABCD, as
well as the 1.000 ABCD price projection, so you can see where we are looking
at. The projection would be slightly different if you take into account the
data outside of the regular trading hours, so yours may differ a bit if you
recreate this with tick charts. Now, the interesting aspects.
The arrows
show the data from where this left off on Friday and the 'gap' opening Tuesday
morning. It not only doesn't look like a gap, it looks like a beautifully
smooth downtrend. So, it just comes down to what is the premise off the ABCD,
and what move is being targeted. The shakeout may indeed have been a shakeout,
but it wasn't a big gap.
To add to the intrigue, if you will, I added a line,
unlabeled, that is a stop line I showed in Kane Trading on: Trade Management.
It is a last resort stop line that I have developed for very specific technical
reasons. It is frequently approached very closely, but not tagged, in my
experience. The same thing happened here. If my goal was to play this for a
break over the 'big' area, with the ABCD as a launchpad, this is a common place
for me to move my stop to. Those with the book should understand exactly what I
did here, and why.
Let's look at USO, for comparative purposes.
Here's USO on a daily chart. It has finally
made it to its own upper parallel. I threw on a 1.128 external retracement off
the ABCD we were just looking at, and another line, which I can't explain in
here, but it is in the books. I also added a 'crazy' trendline on there in red.
You can see how USO in in a critical decision making spot in here, too. It's
been trying to postpone the decision as long as possible, but soon something
has to happen here.
Let's drop down to the 60-minute chart, to see some
interesting things.
Here's the same ABCD as in crude, and the
reaction. You can see the gap here, since this isn't going to be trading when
crude was doing its trend down. The first arrow shows the same area, with the
same line I showed for a potential stop. This isn't an 'after the fact' type of
line, it is straight out of Trade Management, where I explain the
specific times when I consider its use, how I create it, and why I use
it.
Now, as USO stalls at its critical area, I noticed this set, with
an overlap of the two most key retracements, off the two key, and obvious,
swing-lows. If this does back off, this may be a smaller 'launchpad' to get the
area 'taken care of'. Maybe not. Maybe it doesn't hit this spot, Maybe it goes
right through it. Maybe it launches from here, or gaps right over the area. All
I can do is look at some possible scenarios where I can act if I see fit to,
and sit back and watch. It's sometime hard for a lot of people to grasp this
idea that I am looking for moves, and I am looking for ways to get in on
moves.
Sometimes there is a move, but it didn't give me anything to work
with. If so, I just look for the next potential opportunity. That's all I can
do. Most of what I watch for never comes together. Just think of this. If I I
create three, or maybe four, possible scenarios for an issue, and then I watch
and see what it does, at best only one will unfold. So, by the very nature of
the process most will not happen, and that's just a part of the process. What I
care about is that I have a scenario in place if something I am studying does
unfold.
I don't have a lot in the way of closing comments except to say
that although this is the longest running bull market in history without a 10%
or greater correction, the commercials are still very short, and bullishness is
rampant, the market is still going up, and new all-time highs are all over the
place in profusion. On top of that, I am seeing something all over financial
television that is a real tip off.
They are parading out analyst after analyst
now who are saying the correction of 10% should start any second now. They are
wildly bullish, but accept the correction is imminent. Now, although it does
happen, when are the television analysts all right at the same time when they
all say the same thing? Makes me wonder if this has a ways to go yet.
Regardless, I am only willing trade the charts, and I never try to call tops or
bottoms. I'm just cautious, and my focus is moving shorter and shorter in
timeframe, as the inevitable gets closer.
The next commentary will be next
weekend's edition, posted by Sunday evening, March 4, 2007.
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