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 November
4, 2007 Commentary (weekend edition)-
I'll get my
obligatory 'Wow, is that market something, or what...' out of the way, and then
we can get on with what I think is a very solid, educational commentary today.
The dollar continues to sink to new lows almost daily, as they keep yapping
about a strong dollar policy while they let the dollar go 'where no U.S. dollar
has gone before'. I really wonder if the Euro will hit 2, as I jokingly said
many times in the past. Gold is smoking, and all the talk on oil is not even
100 any more, that is a foregone conclusion, it's what happens at 140-160 now.
But, inflation is under control, no worries, the government generated CPI (you
know, the one that the totally bankrupt social security uses for indexing (talk
about the fox guarding the henhouse)) says we are fine. Every time I go
shopping or pay bills I can't walk straight for awhile, but it isn't from
sticker shock, I'm sure.
The sub-prime crisis is just beginning to unfold, in my
opinion, and I still believe it will prove to be bigger than the S&L
crisis. This is one for the history books. I think it is so deep, and so
pervasive, in so many places that they simply can't admit it is, that it will
take awhile to shake it all out. Shoes will be dropping, at 'random', for a
long time to come. That's my take. And it will produce some wild market
volatility. The curious thing is that with inflation as rampant as it is, I am
a 100% firm believer that rates should be rising ala Paul Volcker, or we are
going to possibly have an issue later of epic proportions. But it's hard to get
off the money printing kick once hooked, especially when it has been used to
create one ridiculous asset bubble after another, and to pump up an economy
that 'needs' a corrective recession.
Now, what's the relevance to trading? Well,
this month I'll stick with the same chart of the month on the longer-term
10-year index, because it is still the most relevant chart I see out there, and
it is still at a critical area, with two other critical areas to watch. There
is a 'flight to quality/safety' right now, driving the rates down, and the
yield curve is flat as day old beer. The charts clearly shows that key 4.00%
percent area below, and the 'breakout' area above to change the multi-decade
downtrend, pointing towards Greenspan's 8%. All I can do is see how it acts at
key areas and see if I can create a decent trade premise. I have no idea what
it is going to do. And that leads to out topic for the day...
I'll try not
to get too far off topic here, or too wordy, but we all know my penchant for
both of these. It all started when I noticed a post on a well-known forum
asking for feedback on Kane Trading products. I thought this was a reasonable
request the person had made for input. Without going into all the interim step
details, this led me to post a similar topic at the public KT forum over at
mypivots.com,
where the free private
forum for full book set buyers and mentor students is hosted right now.
Although the topic was created for those who had bought the full book set or
mentored with me to post, it has gotten some questions. That led me to some
posts, both in the public and private forum, and the thought I had for today's
commentary. Hopefully, this will help address some of the questions, and
provide for some solid food for thought, which is always my goal.
Before we
begin, this commentary has a large basis in the material in my free articles, especially
'The Myth of Predicting the
Market'. If you haven't read the latter article, please do so now
before proceeding, or if you don't quite recall it, please reread it and
refresh your memory. Much of what I will show and discuss now is based on those
principles. Assuming we are all now caught up and familiar with all that, let's
proceed. I will write as though everyone knows what is in that article.
The main
question I was motivated by were requests for charts in advance. It is one of
the most common questions I get. It usually comes with some comments like 'nice
after the fact chart', and how easy it is to show with hindsight what happened.
I've went on in detail on all this in many of the previous now-archived
commentary in here, and in various articles and FAQ's, so I won't redo that
work. A few comments are posted on the public forum on this, and you can follow
the link above and read those if you like. Today I want to look at the things I
am watching in the S&P, and explain the logic of how I view things.
I'll start
with a chart that I requested to be posted in the private member area, since I
thought some nice, educational discussion may follow, and that is the purpose
of that forum. I suggest things that I think are likely to have significance or
relevance, and then as things unfold valuable discussion of the methodology may
ensue.
This is the chart I asked to be posted. I
made the request on October 29th, and it was posted later that day. This chart
shows the action as of the 31st, so the discussion began a few days before this
point. The set was on my charts right after the uppermost arrow. This had me
looking at that 1.272 area. The next area of interest was at the third arrow.
Now, this is nothing more than a 'standard' set, and standard sets are a tiny
fraction of my methodology. I pointed this out because I was looking at many
aspects, and my overall analysis was that this spot was going to be a key one,
whether it turned price action or not. I wanted students to focus on it and do
work around it to see what they could see.
Let's see what happened from
here.
The S&P dropped like a rock off that
area. Recall the strong close at that third arrow was the Fed day ramp,
followed by the 'we don't want it anymore' crush day. I asked for someone from
the private forum to post this in the public forum area, and posting that was
tantamount to an open invitation for people to say, 'sure, that's great after
the fact' and/or 'sure, you say that was posted in the private forum, but we
can't see that it was...' and so on. These are reasonable and fair comments,
and got me to thinking about commenting on what I call the trap of posting
charts in advance. Again, refer to the 'Myth' article above, and the comments I
wrote at the forum for more details.
The point of the methodology, as I have built
it for myself, is to find areas where I think I may have a small edge. As I
have expounded upon endlessly, the PTA (potential trade area i.e. 'the setup')
is approximately 10%-20% of my entire comprehensive 'Trading Plan'. I feel one
can never get a big edge (or if they do, it will soon be discovered and arbed
out by the endless program traders). My approach is to develop a plan that
collects small edges across the entire plan. Again, see the 'Myth' article, and
all the free articles. Most people are 90% or even 99% about the setup. With
few other skills, that setup better be good. It better be real good. It
better be unrealistically good (and hence essentially unobtainable). Many trend
traders can be successful in the 30%-50% win/loss range with high enough
reward/risk ratios.
But it goes much deeper than that, as an integrated
entry trigger is part of my
methodology. I need to see price react, and react in a certain way before the
'in advance' chart has any use for me. Once more, see the 'Myth' article. Those
that want to see charts in advance, though, haven't studied the concepts I
developed specifically for this methodology. So, the chart has no 'context' and
no meaning without all the integrated pieces of the puzzle that must be there
to create the whole. You see, this is not how the reasoning should
go:
Wow, that one did just what the chart implied, the methodology sure
is great. Say it went right through the area, which is great for me because it
gives me a lot of information, and didn't trigger a short at all, Wow, that
methodology sure isn't much, that in advance chart got blown right out. Or, say
it rolled off that, went to an area below I specifically watch, and then
rocketed up. Same result, the in advance chart 'blown out'. Methodology doesn't
look too hot. But perhaps I was able to get some work done, move my stop, read
the action, decide it was not playing out, and close out. All in all as much as
I could ask for. The oversimplified look at in advance charts without the
remaining 80%-90% of the methodology is absurd, yet that is what people want,
to either try to get free 'setups', or to evaluate an entire methodology. It's
just crazy.
The other 'trap' that many people fall into, with many if not most
methodologies, is to try to 'predict'. Some people like to trade one issue. So,
at any given time they want to 'know where the market is going'. I can answer
that, and although I never make any claims, maybe we can call this a 'facetious
exception'. I think I can say I'm close to 100% correct in this 'prediction'.
Where is the market going tomorrow, Jim? Answer: I don't have a clue. No idea.
On any given day the market can do anything allowed by the laws of physics. My
methodology was never designed to predict the market, and as the article
clearly states, I don't feel predicting is a necessary part of trading. I'm not
the only one to say that, many books by very famous people have been written on
the subject.
I'll explain a bit here, and then we'll get back to work. My
methodology looks for areas, mostly based on ABCD patterns, where I see a group
of factors from different techniques come together, forming what I see as a
potential synergy. That is an area I may be interested in trading, if price
action behaves in very specific ways. Most of the time there is no area to
watch in a given issue. When there is an area, many times the area is never
hit. No big deal. Many times it is hit and rocketed right through. Again, no
big deal. Sometimes it is hit, triggers me in, rolls over, and stops me right
out. Well, that's trading. The only thing that matters to me is if I feel I
have an edge, over time, with the entire methodology. Nothing I have gives me
any clue where the S&P is going on the next trading day, or week, or
anything.
So, in advance charts that don't complete, that get sailed right
through, that give a small reaction and then 'fail', they tell what to
the person who has no clue about the remaining 80%-90% of the methodology, or
the person who has seen the work but hasn't put in the 'commercial airline
pilot or architect' work on it (and found they understand it, and have
determined it gives them, specifically, their own edge)? See the point? Posting
in advance charts to try to 'prove' or demonstrate something totally out of
'context' of the entire comprehensive methodology is a losing game, in my
opinion. Enough said, let's get to work.
I'll drop down to a 130-minute
chart and add a few things.
I've added on my most key set, the upsloping
set, right out of Kane Trading on:
Median Line and Fibonacci Synergy. I put on just one division line for
that set. Isn't it interesting how price reacted right there. This is also the
completion point of a pattern I haven't published in the books, although I show
it to mentor students, and discuss it a bit in the forum. It is what I call a
'secondary' or 'specialty' pattern that I use when certain conditions come
together. I have a lot more interest in a more 'standard' pattern that may
complete below.
I'll add some things onto the chart, and then we'll discuss what I
did.
I noticed the most obvious ABCD here, my chief 'bread and
butter' pattern. This is where I start all mentor students. I just showed the
1.000 price projection here, but I look at many alternates. I noticed the two
lines intersecting at that ABCD area, and so I tried a few time factors. I
generally feel they are not necessary to my work because the lines give me the
time factors, as explained in the books, but nonetheless, it is interesting.
The .618 time projection and the 1.000 time retracement hit this same spot.
This would be a very interesting area for me, if it is ever hit. OK,
here's an in advance chart for you. Not to sound mean or grouchy or anything,
but big deal.
What if the pattern that I just mentioned above is 'the one', and
this goes straight up from here? Does this chart tell you anything useful about
the methodology? What if the price action doesn't trend somewhat smoothly down
to this area, but puts in some action that doesn't seem right for a CD leg?
Then I may not be interested in the pattern. But no one will know that, all you
have is the chart. If you don't know how I read price action within the
'context' of the entire methodology, how will you know what I might consider
doing with this setup if it gets there? You won't. What if it hits the area
dead on, but sails through? Maybe I might be short, and if I get no reaction I
ride, and if I get a reaction, I may scale and then be triggered long. If it
goes right through I might be the happiest camper out there. Yet many would see
the methodology 'failing'.
Sorry, but trading isn't that simple. It's a constant
assessment of clues used to make decisions, based on a detailed, comprehensive
methodology. My books are designed to show people things I have learned that I
feel may be of use to them in formulating their own, unique 'Trading Plans'.
Things to look over and see if any of them are of any use to them. Maybe some
are, maybe a lot are, and maybe none are. That's an individual decision, based
on study, practice, and due diligence. Showing in advance charts does not help
me try to help people formulate their own plan, and 'do the work'. I hope I'm
being helpful here, and not seen as going on and on.
Let's
continue with a drop to the 15-min chart.
You can see the wild Fed action there, before
the sell-off. Notice what is happening right now, though. A potential pattern
is forming here This is what catches my attention, and 'how it starts' for me.
Many, long before my time, simply traded this pattern by itself. I do much
more, trying to see if I have a multiplicity of factors, a potential synergy,
in the completion area.
Let me highlight what I am looking at.
There is an obvious ABCD shaping up, set up
to continue this downtrend. We'll get to this, but what is right below? And
what about the possibility that the other pattern I mentioned completed, and
this is on the way up? For now, let's see how interesting, or uninteresting,
this pattern might be. I'll set about 'evaluating' it. This is basic stuff
right from the books, and the mentorships.
Let me add on a bunch of
things.
I added on some key, obvious Fibs, and a set
from my work. I also noticed the symmetrical time factor from the ABCD that
hits right there (there are other time factors, but I will leave that to the
reader to explore). So far, I rate this setup very highly. I have a slew of
factors all hitting nicely in one spot. In reality, my working chart has
several close 'sub-groupings', not shown for clarity. The area is clear,
nonetheless, and it would be about price action if reached, and not about nit
picking which fractional area will be 'it'.
I'll add two
more sets on here.
I added a 'standard' and modified Schiff set
onto the ABCD. The median line from the standard set and the upper parallel
from the modified Schiff hit right into the area. Talk about a synergy of
factors. Pattern(s), lines, Fibs, time factors, 'context', and so on. So, there
you have it, in advance chart number two. I'm not being condescending or
anything here, but big deal. At times, I find dozens (or even a hundred of
these across the entire spectrum on the weekend if I work hard). Not many get
hit and react as I want. Once more, the 'Myth' article. Now, what are the
chances either of these will play out? I don't know, but the odds I picked one
or two that will seem pretty slim, right? So, what conclusions can one draw
from whatever happens? None, in my opinion. I strongly suggest everyone reread
(because I know you've all read it at least one) Nassim Taleb's Fooled by
Randomness.
Not only that, but all this is without a thorough 'context'
assessment presentation. How strongly do I feel about that pattern that just
completed? What is my overall market assessment, and my sector assessments? How
about intermarket dynamics and analysis? They may have me leaning more one way
or the other. And what about the 'trade it, fade it, or stand aside' concept.
It's not always about the setups, but what I think of the setups. Case in
point. I was talking with a mentor student, and I mentioned, in advance, what I
thought was a great 'case study' in GS. At the time GS had a very solid bearish
ABCD pattern with potential synergies, not too far below the recent all-time
high. This completed on October 25th. (I commented that the 'context' was all wrong, and that
I'd not be willing to even consider shorting that rocket ship in there. I was
thinking 'fade'.)
It reacted to the pattern, but went to an area I expected and ran
up strong, and closed right at the last possible place I would feel the short
might still be playing out. But that was now a 'long shot', and I had another
thought then. I told him what I hoped for was a gap up the next day, over the
entire area, then a small ABCD checkback to give an entry possibility, and then
on to new all-time highs. Well, sure enough, that's pretty much exactly what GS
did. Look for the pattern on the 60-minute chart, and on the 1 or 3-min for the
small ABCD entry. My main area of expectation (not 'profit target', just an
area I thought it may move to if it did what I expected) was in the 247 area.
It did get to that area with a nice-looking trend.
There are two
points here. First, an area is not just an area. I look it over and try to come
up with a premise that seems reasonable. You can't get that from an in advance
chart. Second, notice how I expected this ABCD to 'blow out' based on the
'context'. A blow out many times causes a pop when it happens, in my
experience. If the S&P on the 15-minute does want to go up, then that CD
leg may be a 'wave 3', like GS. Ah, but the same pattern that the S&P may
be reacting to on the daily may also be acting on the 15-minute S&P to go
down right from here... Do I know which will play out? Heck, no. All I do is
pick the best setups I get and see if price action triggers me. I then manage
according to how the plan, designed around the very setups, tells me to. I hope
all this was useful. It was an especially long and detailed commentary, but I
wanted to provide some hard-core, useful content.
As I close, let me just say that I
think some serious action is going to be with us for some time to come. The
volatility is really picking up, and the daily movement in the mini's is
sometimes hard to even comprehend. I'd be on the watch for 'market shock
events', as we seemed primed for one right now. I have to wonder how long they
can keep it under wraps, with crude likely headed well over 100, and the dollar
getting to the point that it will cost more for the paper than the value of the
dollar itself. Then they can do like some other countries have, and stamp three
more zeros on it before they send it out. Still, as long as the system remains
intact I can't imagine asking for more action as a trader than we now
how.
The next commentary will be next month's edition, posted by Sunday
evening, December 2, 2007.
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