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 March 2,
2008 Commentary (weekend edition)-
Hmmm, that is
some kind of action. Even though the last month plus has been pretty flat net
overall, it has rolled up and down and all around, providing a lot of range for
all sorts of various timeframe setups. It's just 'epic' market action, in my
opinion. The so called 'volatility' is just fantastic for trading, from my
point of view. And I got to thinking about today's commentary, and the fact
that I chose to do it, once again, on the stock market. Even with all this
action, the real action is elsewhere. And where is that?
Just look at
those grains! Look at energy. Check out heating oil, and natural gas. How about
those metals? Have you seen platinum, and silver? Copper? How about those
currencies? Look at the Aussie dollar, and the Euro. And those are just a few
highlights. I'm fast becoming a believer in the 'grand supercycle' theory and
the possibility of another decade or two of rising commodities (and
hyperinflation).
If you are familiar with my methodology just take a look at how
many setups came together on these issues to kick off various runs and legs.
Wow. I should be using examples from this arena. I guess I'm just trying to
keep the appeal of the commentary as broad as possible. Regardless, if you
aren't following these issues, you should be. There is a lot to be learned.
Many can be followed, to an extent, with ETF's. Take a look at GLD, SLV, USO,
UNG, FXE, TLT, and many others.
Let me take care of one item of business, and
then we'll jump in. I have now fully transitioned the website over to the new
servers, but the old servers still have the website on them. That should end in
the upcoming month. So far I haven't seen any significant glitches to speak of,
and I haven't had any reports of any. There may be some issues, though, I'm not
sure, when the old site gets removed, since some of your computers may have
host files or whatnot that 'forcibly' point it now to the old IP address. If
the site all of the sudden doesn't come up over the next several weeks let me
know, and I'll see if I can point you to resources that can help you with this.
Probably it won't even be an issue.
Time to dig in. Let's start with last month's
'Jim's Chart of the Month', on the INDU.
I had two key spots I wanted to watch
overhead on the INDU, highlighted by the two arrows. These were just framework
areas, and, of course, would be of little interest to me without all the rest
of the factors I have in my 'Trading Plan'. Nonetheless, this is a great place
to start. Before we move on from this point, let me reemphasize the concept of
areas and not exact points. I watch key areas, then I drop down
and watch price action. I am not trying to find exact spots to the
tick.
Let's see what happened from here.
The INDU dropped right off the first area.
Did it hit the lines exactly? Nope. As you will see on the next chart, though,
with the proper offset lines (this is explained in Kane Trading on: Median Line and
Fibonacci Synergy), it did hit as close to exact as I can hope for.
Even if I didn't have the offset lines, though, I did have another set (not
shown) that was right there, and this is just the framework, there aren't even
any groupings on there, or anything else.
I'll add on a few lines, some
offsets, a slew of arrows, and we'll discuss that.
I added two division lines on the one median
line set, an inner and an outer one. I also put two offset lines near the
lowest arrow, and their counterparts right there in the middle of the chart. I
extended the one offset, so it could save me one step for in here and act as a
sliding parallel also. In reality these are two separate concepts, and the
sliding parallel wouldn't be on the chart before the price went up there
(unlike like the offset, which is put on there as soon as the lower counterpart
is on there), it wouldn't even be on there until the relative high was put in,
and maybe not until I felt I might even have need of such a parallel.
Notice a few
things here. With the offsets the INDU dropped right off the line intersection.
It dropped almost 700 points in a pretty aggressive manner. That's more than
enough to work with. The really interesting thing is where it dropped to, the
next line intersection, where it bounced up. And what did it do from there?
Tracked that sliding parallel like crazy. Notice how it ran between that
parallel and the division line, highlighted with the three arrows. Finally it
broke above all that, and ran straight to the division line, where it threw in
that near doji, and then started to drop strongly. Wow, pretty useful lines, if
you ask me.
Now, here's where it gets really cool, from my point of view. I've
seen the questions asked many times about which Fibs to use, and once I
introduced an additional like fifteen more or so, I started getting asked that
a lot. I've seen it asked with median line sets on the forums. Which set, which
lines? What I have put together, as alluded to in the title of my median line
book, is a synergy of factors, with the 'core' being pattern, Fib, lines, and
'context', with the pattern
being the 'hub of the wheel', as I focus on so much in my mentoring. Hence,
although there may be lines all over the place, lots of Fibs here and there,
and so on, there are very few spots with excellent, highly convergent synergy
spots. That's where I look.
I'll know which lines, which Fibs, and all that when it
all comes together in one spot. It almost literally jumps off the chart at me.
That's no guarantee it will play out, it's just the starting point in my
'Trading Plan' to try to get an edge. In today's commentary I am taking a
'disjointed' approach to try to get the reader to see this and to do some
hard-core deep thinking and work, by showing various pieces separately. When I
show this to someone in person, or as I present it in the books, it is not laid
out, in my opinion, in such a 'guided discovery' manner, it's more simply
step-by-step.
So, let's change gears somewhat radically. Here's what I saw in the
INDU at that last arrow, shown with no lines at all.
I was playing one of my favorite games, the
scenario game, where I try to look at various possible 'pseudo-Elliott'
layouts. As I have said many times, I don't use any strict Elliott, but I do
use some basic concepts in my work. I saw this ABCD coming into the area (with
an ABCD in its BC leg, and an ABCD in the BC leg of that smaller ABCD). Now,
this may have been a 'wave 3' and not a CD leg, and that is just the way it is.
But the line and the 'context' had me seeing many things coming together in
this one spot. I also had a nice time symmetry at that point between the AB and
CD legs. And we haven't even looked at any Fibs...
Let's jump
over to the NASDAQ Composite Index.
Here's a set I had on my chart for quite
awhile. I had a similar one to this one as early as December, and I switched to
this slightly different set a bit after that. The first four arrows show how
well the set was being 'seen' by the price action, and the last arrow shows how
the Comp lined up at the outer division line and sliding parallel when the INDU
was lining up. The lower slightly upsloping line is a major trendline (drop
back and you should be able to see this easily), and the .382 retracement off
the entire bull run up (is it any wonder that this is where the bounce came
in?).
I had across the board things lining up en masse. Either it was
going to roll over, or a huge blowout to the upside was brewing, in my opinion.
I didn't think it was going to go to sleep right there. And I did have a
scenario where much bigger ABCD's could complete up a lot higher, making
everyone think the bear was over (wait, until today I think every did think the
bear was over, or at least that's what the talking heads on television
said...). Keep in mind here, this is a framework, in the 'context' (yet another
way I use 'context') of the other indices.
Let's add a few Fibs now.
Before I even discuss this, let me reiterate
that I never use a Fib by itself, even if I show just one in an area in here.
That's just to show a given aspect or things would get too cluttered to get my
points across. I use only groupings. I have 'core' Fibs I want for certain
layouts, and I may start there to see if they are present, but I need to see
the 'harmonicity' (this is explained in Kane Trading on: A Totally New 5-Point
Pattern, and a little bit in this free article) among many
Fibs.
With that said, look at how the .786 and .886 retracements are used
in this area, the area I showed the ABCD's in the INDU. Only the uppermost .786
wasn't really, really close, and I have another Fib I was actually using there,
but it is one I don't post in the commentary. The point is, these single Fibs
have little use for me, but if they come into areas that I have other factors
pointing to, and they come in with many other Fibs, then I have a potential
synergy, by my way of thinking. I'm showing here how the turns that factored
into the pattern were at key Fib numbers. Then patterns happen at lines, and at
Fibs, and so on. Then it all comes together. And that doesn't happen all over
the chart, it happens here and there.
I'll finish with a 60-minute chart of the
Comp.
Now, here's just one set I had on the Comp.
Arrows one, two, and four show how the set was tracking the median line. Arrow
three and seven show two areas where it was seeing the division line (not
shown, for clarity). The main use for this set for me was at arrow five, where
it screamed short to me as it hit my Fib number (not shown, as explained
above), and approached the .786. Notice the two small black offset lines,
showing me, again, the set is 'seen'. At arrow six (the lowest arrow), right at
that .886, you could see why I was thinking about a possible bounce. Arrows
eight and nine show more reactions to the set, and finally, at that last .886
retracement, the division line comes in and down it goes.
Now, the
point here is to show various pieces of what I look at as I try to construct a
trade premise. If I tried to show everything on one chart and explain it, it
would be too much to see on such a small chart, especially with such a limited
explanation as I can provide in here. Even what we have seen is only a small
part of what I am looking at in my own fully detailed working charts. But the
concepts should be clear.
I have various sets on various timeframes, I'm looking
for various patterns to come together, I'm watching 'context' to see if this
all makes sense in light of my various potential scenarios, I'm looking for Fib
'harmonicity' and groupings using perhaps fifteen plus Fib-derived numbers
(which are easy for me to narrow down, based on where the areas are coming
together and some application specific guidelines I have developed), and I'm
trying to juggle all this together and have some very clear, very distinct
areas come right off the screen at me.
It sounds complex, and like any hard-core
skill, it takes a lot of work and practice to be able to do it efficiently and
effectively. For me, it is almost automatic, and generally a very quick
process. It's not for everyone, but I wrote up my books, built up this website
resource, and mentor a handful of highly selected students for those that do
like what they see and want to learn more about this process. For me, it's
moved way beyond the mathematics, and now I'm enjoying the 'art' part. I just
love to 'paint my canvas' with what you have seen, and just step back in
amazement when I see the market head straight for a spot, and then just turn
and explode right off it. It doesn't happen all the time (of course not!), but
it happens enough that I'll never cease to be amazed it can happen at
all.
As I close, I must say I am getting a bit worried when I hear
things like 'muni' bond liquidation by large hedge funds. I'm getting to be a
real doom and gloomer about the concept of systemic risk and the house of cards
that is an 876 trillion dollar (that's the number I just heard, I don't know
how accurate it is) global derivatives nightmare. When you see how easily the
'87 crash perpetuated itself, or the LTCM debacle, you wonder what would happen
if a similar event occurred with this level of leverage. Nowadays a rogue
trader loss over seven billion is old news ten minutes later. What has the
financial world come to? For those that want to follow up on this there are two
books (among many others) you might check out:
A Demon of our own Design by
Richard Bookstaber
Financial Armageddon by Michael Panzner
The next
commentary will be next month's edition, posted by Sunday evening, April 6,
2008.
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