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 May 4,
2008 Commentary (weekend edition)-
I never had
any doubt what I was going to cover in today's commentary (we're going to
review and follow up on what I showed last time), but what to say in the intro,
well, that was another story. As I've said for some time, all I tend to do is
repeat the same thing every month, about how great I thought the action was,
and so on. I've racked my creative brain to come up with some other things to
say, and I just can't come up with anything. Maybe I've just written so many
commentaries that I used up all my possible intro's...
With all that
said, it sure was quite a month, as far as the action. Sorry, I had to do it. I
decided that I'm not going to bother to talk about how the fundamentals still
have me adamantly in the longer-term bear camp. I'm not going to mention how I
just heard that possibly one-third of all regional banks will ultimately fail.
Or that I saw an official on television saying not 'if', but 'when', your bank
fails don't panic, because the FDIC insurance has you covered.
Or that crude
hit about $120 and we don't even have any serious supply disruptions. Or that
the CRB Index breakout is an over thirty year breakout, so it seems unlikely
food and the commodities will be coming back down for very long. Or that the
dollar breakdown is the same over thirty year breakdown, and any bounce here
may not do more than 'test' that breakdown area. Or that bankruptcies are up
47.7% from last year. Or that every last person I have heard has said we have
no recession, and that the bull is back, the bear is dead. Or...
Ah, I guess I
did it again, I said I wasn't going to mention any of that. And that's only a
drop in the bucket of the things out there. But, alas, the market doesn't seem
to care, and all I would consider trading is what I see on the charts. It's
almost a matter of just being aware that it seems like we have potentially the
worst fundamentals since the great depression, and everyone is arguing we have
bull conditions in place, and new highs are totally justified, in fact, I've
heard a few DOW 25,000 predictions in the fairly near term. Said with straight
faces! So, for now, I just ponder how so many can look at these fundamentals
and scream bull. You see the market going up and scream bull, well, I can't
argue that. But justifying the rise based on the fundamentals? I give
up...
I'll cover a few areas of business real quick, and then we'll get
to work. First, if you recall back a bit when I switched from doing the
commentary once per week to once per month (just over a year ago), I said I
would do that for awhile, then reevaluate what I would do from there. Maybe
increase it back, maybe keep it the same, or maybe cut it out entirely. I got a
lot of e-mails from people saying they were quite sad that I was cutting it
back. My intention was to likely phase it out in favor of more family
time.
Remember I used to do it every day, then twice a week, plus I did
the members'
commentary every day for a year, all this before I cut back to the once
per week. Well, I decided that for now, based on how many positive comments I
get on the commentary, even at once per month, I will continue to do it. It's a
lot of work, but it seems like many people are really getting a lot out of it,
so I'll keep putting out the effort.
Second, I got more than a few questions on my
remote work using GoToMyPC that I mentioned in the last commentary, many with
quite a bit of excitement about the prospect of one-on-one work without having
to travel. I was a bit wary of mentioning that because I am not looking to take
on any additional students, in fact, I cut back in a big way just a few weeks
ago, scaling everyone I work with back to about 'half rations' because it grows
if I don't start saying no to requests.
I have always found it hard to turn someone
away who is asking to work with me if they are serious and hard-working. So,
although I welcome continued inquiries, and I am surely willing to discuss
future possibilities at any given time, please understand that working
one-on-one with students is not something I dedicate full time to (the only
thing I'm dedicated full time to is my own trading), so I must limit how many
people I can work with to a very small number, and many times there will be a
wait. With that understood, feel free to inquire.
Okay, let's get to some hard-core
work. Although there has been a tremendous amount of new things happening that
I would love to cover, I think the best use of time would be to follow up on
some of the things I showed last month. One of the key aspects of my
methodology is management. I have heard a few other traders, in various books
and articles and such, mention how they could take any halfway decent setup,
and with proper management do alright with it. It's refreshing to hear such
concepts, because they speak to my idea of the setup being only 10%-20% of my
'Trading Plan', with the balance being on a slew of other aspects, of which
trade management is a big component.
The idea here is that I don't expect a high
percentage of my setups that begin to 'play out' as anticipated to play out as
big-time 'runners'. That's the exception, if anything, the relatively rare
exception. I am always trying to get enough to work with. Each trader has to
make his or her own decision on a management plan, but it may involve taking
some profits at various points, moving the initial stop up ('break even' is not
mentioned anywhere in my 'Trading Plan' for the simple reason that it has zero
technical significance, only a psychological one, and that's not a way to
trade, in my opinion), trailing a stop, and so on.
For this, I
need some movement off the area, and then I can 'go to work'. That's all I ask
for, give me a chance to do some work. Any setup that does that is great, in my
opinion. Then I can work, and wait around for the big runners. Hit singles as
often as possible, and then when I connect just right here and there I get a
home run. That's my approach, anyway. So, I want to follow up to discuss how
the setups I showed acted off the areas, what they did, and what I would be
watching next as I started to think about 'going to work', so to speak. That's
our plan for today.
We'll start out with last month's chart of the month, in
the S&P Index.
The S&P had hit a key area, and had come
back up to 'test' it. At this point it had not triggered an entry yet by the preferred methods
that I like to use. As we will see later when we look briefly at F, this is the
point where many 5-point pattern traders who like to 'fade' would already be
in. Although that may work for some, that's not my style. I want to see what
happens in the area, and I'm willing to pay up a bit for some extra
confirmation. One way or another, though, if it is going to play out off this
area, it should be happening soon.
Let's move forward a bit from here, and see
what is happening.
The S&P did roll off the area, it has
been triggered for awhile at this point, and is starting to move nicely. I'm
'ready to go to work'. I want to start assessing some areas where this may head
to, areas where I would have to make decisions about tightening up a stop,
taking partial profits if it began to react off the area, and so on. I can't
cover the detail of every interim step along the way to the key area in a
commentary as small as this one (the reader is referred to Kane Trading on: Trade Management),
but I can highlight key aspects. The most obvious area that jumps out at me is
a good start for us here today.
Let's move ahead a bit, and I'll highlight
some obvious things that came together.
I was able to find what I call 'a key set'
for a move down. Part of what had me looking in this area was a small ABCD that started to form. I
showed a key .486 retracement here to highlight the main area, shown with an
arrow. Retracements off the other major swing points, using the numbers I have discovered,
fell right in the area (not shown). The larger median line was also right
below.
If the S&P could get to this area, that would surely be not
only a substantial move, but it would be an area where I may want to be looking
long if it reacted in the area. Now, would this move be a major 'runner' in a
big bear move down? No, at best it would a solid single thrust off the area. I
have to look at 'context',
reward/risk, and a host of other factors, and decide what move I am targeting,
all done ahead of time, to decide what it is I may be trying to do off the
area. The most important thing for today's work is, do I have enough at this
point to 'get to work'? To get myself into a position where the only option
isn't a full stop out? I would say yes, by quite a bit.
Let's move
ahead a bit more.
The ABCD has now completed at the line area,
and after some 'congestion' if you will, shown me it 'sees' the area, and may
be starting to move up off the area. At this point, high to low, the S&P
has moved almost 62 points by my data. Hmmm, almost 62 points? I'd say that's
not too bad. Keep in mind, I posted this setup before the fact as the chart of
the month in here. Is this enough potential profit? If I'm thinking this may be
nice long area, can I get ready for that? You see, the S&P doesn't have to
fall through the floor to make this a very worthwhile setup. Just making it to
next most obvious area was quite substantial here, and this would potentially
allow me to get a lot of work done.
Let's see how this potential long area
did.
The S&P came right off that area very
strongly. If I had any remaining shorts on as soon as it gapped up and started
to move I'd have to be playing a much higher timeframe short play, and be
willing to take a big check back, if I planned to keep holding. With all the
stimulus the government is putting into this thing, that doesn't seem like a
high probability play at that point. So, the S&P ramps up, blows out the
old area (which is a big-time higher timeframe clue), and then comes back in a
small ABCD to 'test' the area from above before moving up some more. Notice how
the lines seem to guide the action, too.
Here's the main thing I want people
to take from this, though. If you only looked at this chart, without any of my
additional areas added on, and no explanation, one might say something like
'Well, it reacted somewhat to the before the fact area Jim pointed out, then
turned and took it right out, and is now well above the area. It doesn't look
like much of an area to me.' Ah, but once you see it dropped almost 62 points
off the area, right to a very probable long area, and then jumped right off
that, you can kind of see what I am looking to do when I find an area. And what
doesn't look like much at first glance may indeed be more than adequate from a
trading standpoint. Let's explore this further with the TV example from last
month.
Before we even get to the chart, let me mention that TV has risen
to a new high for the move in the last month, well above the area I showed for
a potential short last month. So, is it a bust? Another before the fact setup
that didn't play out? Before we begin, I ask that the reader go back to the
last commentary and look
at the TV chart so I can save one chart space here. Let's drop to a 130-minute
chart and look at TV as it hits the area.
This chart, as shown, is a little bit before
the daily chart I posted last month, so although I was already working on this
one here, the reader didn't get to see it before it hit the area, like the
S&P or F setups. On the other hand, it did do a nice little ABCD pullback
shortly after this (you can see this on the next chart, right after this point
in the current chart), so one could have used that for an entry to do some
'paper trading' to follow along and practice.
TV came off the area (shown with
the key line, and two key retracements, since I didn't want to completely
recreate the chart on this lower timeframe). I've already added a similar set
here as I did with the S&P. I added .382 and .486 retracements off two
major swing points, and they point me to an area of interest, shown by the
arrow. I have to start thinking if I see TV get to this spot and I'm short off
the setup, do I want to start thinking long? Am I happy with what I've
accomplished at this point? What's my play? Major bear move on the higher
timeframe, or move off the area to the next most probable area (or simply to an
area where I think things may change)? I have to have a plan so I know how to
construct my management. Starting to see what I am getting at here?
Let's jump ahead to today, and see
what happened.
TV went to this next area, and turned right
there and headed right up. Same as the S&P. How much did it move down? By
my data, the entire move down was 2.25, an almost 9% move, in around eight to
ten trading days, depending on entry and exit points. Then a long triggered and
ran right to the 1.272 external retracement off the setup, even throwing a
small 'test' the old line from above ABCD in there on the way up. It then
rolled off that 1.272, right back to the line (do a .382 retracement and see
how close that is in there), before starting to bounce up. Again, the point is,
was there enough for me to do some work here? I would think so.
My
inclination on setups like this is to use options, and in 'the old days' you
used to hear the percent to double rule all the time. A given option will
double in value at a six or eight or ten percent move in the underlying (this
is based on an immediate move, so it was intended as a guideline, and that's
all), or whatever. Point is, moves like this, for swing trades, have more than
enough, in my opinion, to construct decent trade premises off of.
If someone
just looked, though, at the before the fact setup, then the chart as it is
right now, they might not think too much of it. Yet I see it as two very nice
potential trade setups that played out quite nicely. This is why I rarely show
before the fact charts, because it is more in the management than in how
'great' the setup is, in my opinion. If you can't see the areas I see then one
of my setups is not of that much practical use. Everyone has to construct their
own setups and their own areas, and their own management plan.
Finally,
let's finish with a quick look at F, which didn't 'play out'.
I almost came back after I posted the last
commentary to add a few things that I forgot, but after over six hours of
writing and charting, I had had enough, so I let it slide. I wanted to explain
why I didn't like this one, what it was that bothered me about it, and also
what I was thinking with it. F had been quite beat down at this point, and
there were some other, bigger key lines above that I thought it may shoot for.
Also, the BC leg of the ABCD is quite shallow, and I generally don't like that.
It is not a deal breaker if everything else (or at least enough else) is all
lined up, but combined with other factors I don't like, and it detracts from
the setup for me.
Finally, I was thinking on this one of a more complex option play,
one that might be called a 'gamma scalp' to some, but it is kind of my own
creation, although I can't say that others don't do it, too. It's more than I
can get into in this commentary, but I was thinking something would happen
here, one way or another. That has many option traders thinking straddle, but
for me I didn't necessarily expect a long trend that would overcome the cost of
both options, but I did expect some wild swings. By readjusting the play at
points that I expect potential change, especially if I start to see a reaction
and get an entry trigger, I can combine things like we have seen above with
this technique. That was what I was thinking on this one.
So, F ran up
to the area, went through it a bit, but not enough that I wouldn't still
potentially be interested if I was really committed to an outright short off
this area. It starts to 'see' the area a bit, but only triggered by some of the
very fine triggers that I might look at. Using the usual techniques I like for
entry it did not trigger (for the gamma scalping type option play as soon as it
'saw' the area it was time to put on the play, if that was the play of choice,
for me). It then exploded up, and on various news items did a lot of swinging
around, which is very good for my particular option play. A long, strong trend
would not be near as good as wild swings, especially if they happen at areas I
find on the charts, because of the adjusting.
The bottom line here is that F
didn't trigger, or if one had a very fine entry trigger (here's the
disadvantage of a fade or fine entry trigger, as I have said many times), it
was a quick stop out. Not every play reacts at the area of interest and plays
out as desired. I wish it was that way, so I could write these commentary from
my private yacht docked off my private island, but alas, that isn't real life,
at least not for me. But I do see quite a few things react off areas I find,
and as we have seen some of them I posted here in advance. The critical factor
for me is putting the entire plan together to find areas, assess 'context' and
filter the setups, wait for adequate entry triggers, come up with a management
plan based on 'most probable' moves, or some other logical assessment of what
may be unfolding, executing trade closures based on technical information as
price action unfolds, and so on. In other words, having a complete 'Trading
Plan'.
As I close, let me quote from last month: "As I close, let me just
say that I am not convinced, like everyone else seems to be, that the 'low is
in' and 'the bear is dead'. Maybe it is, and I'll surely be on the long side if
it is going up, but until proven otherwise, I'm always ready to be on the short
side whenever the setups come together." I hope what I showed today
demonstrates the above concept. It's all about the setups, not about what I
think, fundamentally, and over time, is most likely to play out.
As a final
thought, let me comment briefly on this month's chart of the month. There is a
key area overhead that the S&P may not even reach, but if it does, it is
the most critical to me since the move up. I chose to show it a bit differently
because there are various key lines coming together in the area. I also added
just the main .618 retracement along with a possible ABCD 1.000 price
projection, which hit right on top of that. All this is just a broad framework,
and my work will be much more detailed and refined if the area is
approached.
Nonetheless, the area is clear, and I will be watching that spot
very closely if approached, because if that doesn't turn the market back down,
I would be expecting new all-time highs would be hard to hold back. As it is,
the trannies are almost back at new all-time highs, and if the S&P did get
up to that spot, I'd think the trannies would be smokin' at new highs, and
that's not good for the bear case. If it wasn't for those darn pesky almost as
bad as the great depression fundamentals hanging over our heads like the sword
of Damocles. I know a bull climbs a wall of worry, but this isn't worry, this
is like worse than a wall of paranoid schizophrenia....
The next
commentary will be next month's edition, posted by Sunday evening, June 1,
2008.
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