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 April 1,
2007 Commentary (weekend edition)-
Wow, so many
things happening in the market, and so many here at Kane Trading, I don't know
where to start. I think I'll start with the 'business' items, and then we'll
get to some charts. To start off, I did get a fair amount of feedback on my
'announcement' from last week. Most of the sentiment was identical, saying my
commentary would be sorely missed, some even saying it was the highlight of
their week, but that they understood where I was coming from. One of my
students who shows tremendous future potential also suffered a tragedy in his
family, too, and he really related to my needs to get back to my family. The
funny thing is that I didn't get one single e-mail from anyone who hadn't
bought the books or mentored with me. Not one single comment. I find
that rather curious.
Now, since last week I have been thinking on when I am
going to implement the move to once per month, either with this commentary, or
at the beginning of May. Given it is now tax crunch time, and the weather is
really starting to get nice up here as spring is springing (ah, you see it
coming now), I decided to launch the new format with this commentary. The next
commentary after this one will be the first weekend in May, some five weeks
from now. I want to make it very clear though, that this change does not mean I
have any plans to fold the site or to stop selling the books, or doing
mentorships for the very serious. As soon as any changes are made, it seems
some people can't help but misunderstand. I'm just cutting back on the
commentary to get myself some family time.
As I've thought about the changes
in the commentary I realized it probably would be better to step up the
timeframes in most cases, so that they might remain 'timely' for a longer
period. This may be a little misleading in that those new to reading the
commentary may feel the methodology is designed only for weekly or monthly
charts, and not realize my forte is intraday mini's, all the way down to tick
charts. I recently did an FAQ on
this, so please check that out if you aren't clear on my fractal
viewpoint on the methodology. Hence, I will try to choose a chart of the week
(which will now become the 'chart of the month') and the commentary such that
it may be something to follow until the next 'edition'. This will be a
challenge, but hopefully I'll be able to choose well. Keep in mind, the charts
and the application of the methodology that you will see on the monthly chart
today is essentially identical to what I do intraday with the Russell
mini.
Finally, before we start, let me mention that last week, knowing
that this commentary would be dated on April Fools Day (even though I posted it
early, as I sometimes do), I decided to throw a little joke appropriate for the
occasion into last week's commentary. I thought I'd get e-mails all week about
it, and I got one almost immediately from one of my top mentor students, and
that was it. I got to thinking maybe no one was going to get the joke, or that
I'd look kind of stupid, but then I realized if no one e-mailed, probably no
one saw it. In the one e-mail I did get we discussed this, and we both
concluded if I have to explain the joke it is spoiled at that point. So, if you
want to go back and look for the 'joke', go right ahead. The one hint I will
give is that I wouldn't purposefully joke about data or chart setups or the
methodology, so it is something outside of that, and it's obvious once you see
it. And since it is so obvious, please don't send me an e-mail asking if that's
it...
Today I'm going to look at rates, since they are really 'in play'.
Between the Fed (Hey, did you notice Cap'n B clarified the statement, saying
exactly what I thought the interpretation was, and straightening out those
talking heads that always seem to be wrong?), Iran, the 'housing bust',
mortgage and credit woes, and now protectionism and potential trade wars, this
area is going to be on the front burner. Today I am going to play the 'scenario
game' that I got so many positive comments on the last time we played
it.
The point is not the exact layout for rates I will show, but the
thinking process. When I have five weeks until the next 'communique', I need to
show many possibilities. Maybe none will play out. The point is, I am always
looking at possible things that may unfold, and thinking about how I would play
them. I also need to mention, especially given the small size of the charts I
work with, I can't show near as much on a chart as I really need to, or near as
much overall as I'd like, to convey my concepts. So, although this should be a
nice series, it will barely scratch the surface of all that I am watching, so
please keep that in mind.
I'll start out with that same old monthly chart on the
10-year index that I showed last year year, to give us the 'context' for our
discussion.
Rates dropped right off the area I was
watching back in the middle of last year. This set actually goes back over two
decades. As I suggested before, you should do the longer-term monthly and
quarterly charts on this, and reread my previous commentaries on rates, which
discuss my thoughts on the historic implications of that almost half a century
low in rates there. Now, notice the smaller uptrending set with that key .382
retracement and lower parallel, as discussed previously. Rates jump up, then
roll over, and seem to penetrate the lower parallel a bit. Normally I'd think
this a sign of weakness, but there is something else to be aware of on this
chart. Do you see it?
Before we drop down to a weekly chart let me
add one thing onto this chart, while we still have this nice
perspective.
I added an obvious trendline on there, one
that we can be sure just about everyone on earth sees. Notice the bounce came
right above that. The question for me now is, what potential scenarios can I
sketch out, since this is how I 'do my work', and lines are free, after all.
What are some things I want to look at, so if they unfold, I might be ready to
make a trade there, if I get what I'm looking for at that time? I don't care if
these things happen at all, and just by the fact that many are opposite some of
the other scenarios, very few even can happen. I just want to be ready
if one of them does.
Let's go to the weekly, and look at the smaller set in
more detail.
Here you can see the trendline area bounce,
right near an .886 retracement. The question on my mind is, what do I make of
this layout? What can I see possibly coming together? This is the exact same
process I do for intraday mini layouts, stocks, commodities, on all timeframes.
The process is always the same for me. So, although I can see this 'creeping'
up those two lines, I really need some higher timeframe perspective to give me
some ideas if that lines 'goes'.
I'll add on a set from the higher
timeframe. I wish the charts could be large enough so more of this could be
seen, but this is what I have to work with. If I go back to the monthly, there
isn't enough detail. The set is obvious, though, so this should show enough for
you to recreate it.
So, this set shows me two clear lines below,
a lower parallel, and a division line above that. And what about potential
patterns? I'm looking for pattern, line, and Fibs as my most basic basis for a
premise, if I can get it. Hopefully you see the potential ABCD pattern that could shape up
here on a drop. Let's explore that scenario.
I'll zoom in a bit, add some
groupings onto the chart, and do some labeling.
Now, notice how the point labeled B bounced
right off the .382 retracement there. That is a major .382, not one off
some small minor swing. The .447 hit in the division line area, and the .618 at
the lower parallel. I added in some additional numbers to beef this up. Even
though the lower area seems wide, keep in mind this is based on a
monthly/quarterly chart, and even though this is a weekly chart, we are zoomed
in quite a bit on this. I find this quite a tight area for this layout. So, one
possibility is that the ABCD plays out to the lower parallel, or that a 'stab
fake' takes out the B point, going to the division line area, and then it
bounces from there. But what about if it goes up from here instead?
I'll drop down to a daily chart,
and look at something.
What if this is headed up, to a possible
ABCD, as shown here? Maybe that could be a 'wave 3' instead, or maybe just an
ABCD. And this would not invalidate the previous scenarios, because this could
be an ABCD in the BC leg of the possible ABCD to that lower parallel. And does
that ABCD come in at an area that is significant beyond the obvious work that
can be done on the ABCD itself, as shown here? You know it does. Before we
consider that, note that I also highlighted an area by the division line,
because that is also an 'action spot' for multiple reasons. I'd do some
trendline work there, as that is worth seeing, and there is also some pattern
work to be done.
Let's go back to the weekly chart, with some additional
labeling.
I know the chart looks cluttered, and without
a much larger chart so you can see where a lot of this comes from, it can be
difficult to follow. And I've left a lot off, too, just so it isn't a chaotic
mess. So, maybe it pops up to the area where we can see two lines there, and
completes that smaller ABCD. But is that enough for me to suspect it may turn
down there, if it did unfold like this?
Well, go back to the first chart. Where is
that sliding parallel that started this bigger drop in the first place, from
last year? Yes, right in there. If that goes, and does it in a 'wave 3' looking
structure, do you think that has clues for me? And all that sits beyond that is
the upper parallel itself, one that goes back for decades. Would that be
a significant break? Sometimes it's about finding a specific trade, but many
times, for me, it's about the bigger picture. Rates are going to be key going
forward, as they always are.
Let me just ramble a little on intermarket dynamics
here. Say we go down the protectionism route. Then China decides not to
recirculate the dollars back to us. Hmmm, what will that do to the dollar, and
hence rates? See the point of that? How about Iran saying they will no longer
accept dollars for oil, only Euros? Recall that was the word in Iraq, you know,
right before the U.S. toppled the government there. Recall how Venezuela has
said they no longer want to accept dollars. We are the world's reserve
currency, and the world's largest debtor. See the problem there? The move is on
to price oil in Euros, and I'm not sure it can be stopped, and the dollar is
getting weaker and weaker.
Oil could get even more expensive soon, without even
looking at the fundamentals. And is inflation, which I think is rampant,
going to be reflected in rates? Will the Fed lower rates and 'monetize' oil,
and the rest, and cause an inflation explosion? I think 'stagflation' could
rear its ugly head, where the Fed is forced to raise rates as the economy goes
into the tank because of $100-$200 oil. My point is not to be alarmist (at
all), only to say that these, too, are 'fundamental' scenarios that may play
out, and I feel the charts and layouts above will tell the tale. I feel it will
all be in that rate chart. I will be taking what happens at each area very
seriously as a big clue to 'the big picture'. Sometimes the one single trade
right before me is the least of my concerns.
As I close, let me mention the
'chart of the month'. I tried to pick one that may unfold over a longer time
period, and have some educational value. Maybe it doesn't hit the area at all,
and maybe if it does, it doesn't respect it at all. Look at the bigger
'context' and see what you think of the entire layout and positioning. It has
went into a serious 'consolidation' here, and something may happen soon. One
way or another, I'll be looking to see if I can construct a trade premise based
on what happens. Maybe I can, and maybe not, that's trading. Also, this is not
the most liquid stock, and hence I only look at it on higher timeframes. It is
an old time high flyer that still gets some attention. So, with that, see
everyone in five weeks.
The next commentary will be next month's edition, posted
by Sunday evening, May 6, 2007.
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