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 March 4,
2007 Commentary (weekend edition)-
Oh, my. Oh
my, oh my, oh my. Let me quote from last week: "I'm just cautious, and
my focus is moving shorter and shorter in timeframe, as the inevitable gets
closer." Now, I will admit, this was one of the times when, at least for now,
all the financial television analysts were exactly right in their timing, but
don't forget that a stopped clock is right twice a day. It's like that saying
about the analyst that has predicted fifteen of the last three bear markets.
Eventually you'll be right at the exact right time. And still, they said 10%
correction, and we don't know yet what this will be, from a historical
standpoint.
Now, it also stands to reason that I have been saying that the
sentiment, historical bull market averages, the commercials, and so on, point
to an end at any time of the current, smooth run up. Unlike the analysts I
mention, I am not predicting when this will happen, as that is calling a market
top. I just know that at some point in this general area something vicious in
intensity becomes more and more likely, and I'm not going to be overly long
exposed with longer-term positions. The reward/risk for that gets borderline
ridiculous. It a matter of exposure, not prediction.
Before I get
to today's work let me mention that I know of a few traders that didn't really
heed this warning, and were getting longer and longer as this ran up. This is
almost a 'top heavy' pyramid, adding more and more as it goes farther and
farther. Like the examples I describe in Kane Trading on: Trade Management,
no warnings I could give to err on the cautious side as far as extreme long
exposure really did any good. These traders were hurt real, real bad on
Tuesday. They were up nicely before this, but many gave back all their hard
work and way more in one shot. To me, this just isn't professional trading. I
don't say that to be condescending or anything of the sort, only that history
has shown those people that manage that way rarely last in this
profession.
Now, I'll comment on the action, and then we can get to work. From
a trading perspective I have to rate this as the best week I have ever seen, or
in the very top. At the least, it was so much better, with the fantastic
volatility expansion, than the recent action, which I found to be just great as
it was, that I couldn't even compare the two. What a difference between the
perspective of a trader and the perspective of a long only investor. I don't
know how long it may stay this way, but I, for one, absolutely love it.
For today I
am going to cover some Russell layouts from this week, but not the ones you
probably expect. I need to comment on a few things to get us ready. First off,
I was pretty excited when I came up with what I was going to cover today, only
to end my chartwork for this in disappointment, as I realized I was only going
to get to talk about perhaps 1% of what I saw this week, as far as details.
Maybe you could argue it was actually 10%, but regardless, it was so much less
than the intricacies of what was there, it 'feels funny' to me to even show it,
it's so 'brief'.
I will say that a lot of what I saw was discussed in the free forum
(if you are a full set buyer and haven't checked this out, you might want to
consider it, since it's free), prompted by comments and hints from me to look
at this or that aspect. My full set buyers and mentor students who follow the
forum will likely find today's work extremely basic. I will try to make a lot
of comments as we proceed about where to look and what to look for, to dig into
this in more detail.
Next, I wanted to say that our work will start well
after the great Tuesday, perhaps the best trading day I can recall in recent
times, but there was something there I thought was important to look at. This
big gap down day had an entirely different look when you included the overnight
data and looked at this on a lower tick chart. The selling was smooth, with
multiple patterns and setups along the way. This held true throughout the week,
and from the discussions I had with other traders who follow the methodology, I
wasn't the only one who got little sleep this week. When the action is
worldwide, the overnight can be critical. Do some work on this and you may be
surprised.
Finally, I will say once again, once I finished my
charts for today I was stunned at how little I was able to show. I couldn't
show 'context', and I had
to add things that I couldn't even show the anchor points for. I will do my
best to describe how things were done, when important, so you can go back and
do your own work and recreate things. I couldn't cover anything about the huge
clues that developed that tipped this off, as that is outside the scope of what
I am covering today, but there are some excellent posts in the forum on that.
Overall today's material is some great stuff, I feel, but it is all in the
'context' of not only a major worldwide market event, but in the 'context' of
my entire methodology, and that isn't all included here, obviously.
I'll start out with a 60-minute
chart, showing a 'adjusted' median
line set I have had on my chart for quite awhile.
Here's a set that has shown me that it is
being 'seen' by the price action, for example at the area of the two arrows,
well before it made multiple failed attempts to take out the upper parallel
there at the highs. I also showed some offset lines I was looking at. I could
have chosen a set that didn't need those offsets, but I didn't like how it
described the price action near as well. How I do this is in
Kane Trading on: Median Line and
Fibonacci Synergy, and why I feel it isn't after the fact 'curve
fitting'.
Now, at the time shown here this has already triggered short for a
counter-trend trade, in the manner that I describe as far as counter-trend on a
lower timeframe. This is the spot where I suggest looking at the tick chart
during the overnight, to see what it did from this point, before the gap that
we will see shortly. So, first study this 'top' and the various sets, lines,
patterns, and Fibs and see why this was such a clearly triggered short on the
lower timeframe, and then see the overnight follow up on the tick chart to see
why the gap wasn't really a gap if you did this work ahead of time.
Let's look at that gap, and
subsequent move.
If you look at the various issues you will
see a classic 'zoom and retrace'. I don't discuss that technique in here
because it is well known among median line traders, and the parameters are easy
to find on the Internet. I noticed the 'gap' was right at the median line area
from my key set, and that as it rolled from there (do the lower timeframe work
and you'll clearly see how this set right up perfectly for yet another short
entry). My question, for our series, is now what? We all know everyone was
short like crazy up to this point, but now what do I see? What about this lower
parallel area and this plunge bar? Now our work for the day starts.
Let's move ahead a bit, and see
what the Russell did off this lower parallel.
I will leave it to the reader to drop down to
a significantly lower timeframe and note the reaction at the lower parallel.
There was a '3-drives' pattern, and a higher low, as well as some other things,
to set up a 'short covering bounce' play, right off this line. Notice it
bounced right up to the division line at the arrow. There was a superb
confluence here, including a gap Fib technique that hit dead on the area. Not
only that, there was something else here we will see in a bit. Point is, this
came right in nicely for another potential short right in here.
Let's drop to
a 13-minute, and see how this looked shortly after the open.
So, you were in good shape if you shorted off
the area, and you had nothing to work with if you waited until the regular
open. Well, this was a worldwide event, so go to the overnight tick chart. How
nice is that? If you could be around when the opportunities were knocking, they
were there in profusion, in my opinion. Part of being a professional is
adapting to the events that are unfolding, and taking advantage of them when
they are there, not when it is most convenient to the trader. Now, the question
is, what do I see here?
Let's go back to the 60-minute. The nature of how this
last bar is timed already shows a lot of the reaction, but keep in mind the
lines were on there for quite awhile before that last bar, and the latest item
was added as soon as this started to roll over.
As this plunged most people would be far too
spooked to even consider the long side, and for this timeframe it surely is
'counter-trend'. It is also an area where the uptrend could reassert itself,
although that was not my read of the probabilities, at least not yet. What I
want to show, though, is what I was looking at here. I added a horizontal line
on that is from a major swing-low, one that I also used for my set. This was a
key level I wanted to watch The outer division line was also there, and the
1.618 external retracement off that last bounce. Now, keeping in mind that this
is just a framework, would I be thinking this is a potential short-covering
bounce area?
I'll zoom in a bit, add a few things onto the chart, and we'll see
what happened from there.
I had two trendlines on my 60-minute chart
from way back, from some obvious swing-highs. I put them on, and they guided
the action quite well, and gave me a nice heads up when the action broke to the
upside. This was from the previous December and January. I found it curious
that this area coincided with the division line here, and it rolled right off
the spot once, and was now right back there again, at a key .382 retracement.
And because I can only show so much, go back and do the daily pivots (just the
pivot) for Wednesday, Thursday, and Friday. Very interesting, huh?
To be
thinking the 'short-covering bounce' may end here, and another roll start was
just not a big stretch for me. What makes this even better is the price action
here on the lower timeframe. It was so distinctive that I commented in the
Harmonic Trader chat room (yes, I still hang out in there for the company) to
watch out for a sell, right as it peaked. Go to the 1-minute or the tick chart
and look at that pattern!
Let's see what happened from here.
The Russell just dropped right off the area,
and sold all the way into the close, ending the week just about right on the
low. Notice how this thing is just playing from line to line to line? It was
knowing how to create a set like I did, which is a 'non-standard' way of doing
it, that gave me the lines to look at in the first place. What would I do
without these lines?
Since I'm on a roll, I'll do a bonus 'chart 8' here, and
drop down to the 13-minute chart to look at this just a little better.
Notice how this pair of trendlines comes
right in and the price 'saw' them four times, and couldn't overcome them. I put
these on, as I said, months ago, and I left them because they were so
significant back then. I frequently see things use lines that were once very
important, even though it seems like they wouldn't be useful at this time. Do
the daily pivots, too, for more curious information.
So, gap
close, division line of a well-tested set, trendlines from the past, a key
.382, and it just couldn't hack it. Throw in a pattern setup and the Fib
confluence here (not shown), and I felt the edge here was on the short side. As
we leave this I'll give you something to study. Look at the price action
between the second and third arrows, on a 1-minute or tick chart, and look at
just how many pattern clues there were that this shouldn't be struggling with
the overhead area, yet it was. What clues!
I hope this series was helpful.
What I wanted to show was just how much there was to look at even though this
had sold a lot already, and many traders were thinking big bounce, or that the
selling must be done. I dropped down in timeframe and watched the lines and the
patterns, and looked to construct premises around that. I don't know if the
'correction' is over or just getting started, and as you can see, I don't need
to know to find potential setups.
I'll conclude with some comments on the chart
of the week. Look at USO, as it just coils right at the area I have been
showing for weeks. Crude itself has gotten just a bit above, and is also
coiling, but it just can't break free. Notice it isn't reacting, though,
either. Is this critical, or what? I didn't show this today because you can see
for yourself how it stands, and it hasn't done enough yet to be worth using up
a chart in here. I didn't choose it again for chart of the week because that is
too repetitive, but watch it, as it is still 'active' as a chart of the
week.
This week I chose lean hogs, which have just had two fantastic
setups in a row recently. That one frequently just goes from line to line to
line. Notice the most recent line action. I'll leave it to the readers to do
some work on this and form some premises. It has to make a decision real soon,
and if it does anything interesting I'll show that next week.
Get ready for
some intense action this week, perhaps on a sub-prime meltdown, or margin
selling, or from some fallout from what was called the worst day ever for hedge
funds (Tuesday). Maybe that's it, and off to new highs we go. Recall how I
mentioned everyone talking correction. Still, I think some incredible technical
damage was done, and given the bull was already the longest in history, it
would be something to see it resume setting new highs. And I heard an analyst
say bear markets never start this way, ever. I wonder now, about
if this really is it for the bull. On the other hand (how many hands is that?),
I can see the Fed doing a surprise lowering during market hours to crush
shorts, like they did when the big bear started, even though I still see their
bias as up...
The next commentary will be next weekend's edition, posted by
Sunday evening, March 11, 2007.
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