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 June 6,
2010 Commentary (monthly edition)-
I'll start
the same as last month's commentary, but with added emphasis: "Wow, what a
month. I know I shouldn't be at all surprised by anything I see in any of
the markets, but I still am. Maybe I'm just a little slow to accept the
surreal..." And I'm sure no one thinks I'm exaggerating right now when I say
this, after what we all saw this past month. It seems every month is more
insane than the last. I expect to be at 2008 crazy times and way beyond any day
now... We do live in interesting times, from a trading standpoint. This is
shaping up to be anything but a dull summer. We even got a new term added to
the lexicon: 'flash crash'. I'll get to that in a minute.
As I
mentioned, it seems my viewpoint from last month's commentary is now a
commonplace viewpoint for many, many very widely regarded analysts and
economists. It's now 'mainstream'. I recall when I first started talking about
all this, years back, and people all thought I was totally nuts. Now I can talk
to a checkout person at Wal-Mart or someone at the local convenience store, and
they follow right along and add on to what I am saying. Now, my viewpoint is
'average'. That won't make the outcome any more pleasant for all of us, but at
least I have some company now with which to discuss these things. And how
funny, today basically a head of state was talking about a 'total reset' for
his country, a clean slate. Hmmm... And pretty soon countries talking 'total
reset' will be mainstream?
Before we move on let me briefly discuss the 'flash
crash'. My opinions are not unique, so I won't belabor it. I highly anticipated
this type of thing would happen, and I see a lot more of it, and much more
severe, to come. The market structure is broken. I've said that a zillion
times. It's almost all robots trading on super-low volume. You take out all the
hypertrades in perhaps three stocks, and what volume is left after that, when
volume is considered very low already? Of that volume, it's not balanced, like
an ecosystem is balanced. It's mostly computers trading with themselves for
liquidity rebates, and, in my opinion, some manipulation to keep it grinding up
as part of the 'great reflation experiment'.
This is far different than when the
market has a variety of participants such as mutual fund buyers, hedge funds
buying for other reasons than the above, traders of various kinds, investors
with many different time horizons, and so on. All the levels of price are
'deep' because participation is deep. Now, as I understand it, most of the bots
are programmed to trade when volume is light. As soon as volume picks up at
all, I think they are programmed to shut down, and with them goes what little
liquidity there may have been.
That's why we see light volume for all the
rises, and huge volume for any declines. The 'flash crash' was an example of
what can happen with a broken system like this. All the high frequency traders
(HFT) simply shut down, and essentially no one is left. The reason we saw some
good solid stocks trade as low as a penny? That truly was the only bid from who
was left. At that point in time, in my opinion, the true free market value of
that issue was in fact a penny.
Now, the thing I noticed right away was how
technical the move was. I consider that 'flash crash' as totally valid
technical action (we will explore this a bit in today's work). Despite what
many say, I think the market was finally temporarily free, free from
manipulation, free to do as it should for the structure it had at the time.
Instead of accepting that and realizing that the system is completely and
utterly broken, they come up with some lame excuses, erase the trades, and now
it's barely a distant memory. Until the next crash has the S&P trading at
100, or 10. Then they'll just erase it all like it never happened, and do a
'reset'.
Isn't it amazing that now when they don't like the prices things
trade at, they go beyond manipulation of the prices and simply erase trades,
say the prices aren't valid, and start over with new prices? For an error I
agree 100% with this. But who is to say when it's valid and when it's not? Once
they start down that slippery slope, they can do that any time they don't like
the price action. This, instead of facing up to what is really going
on.
The problem, though, with facing up to the reality of the broken
market is that they would then have to make changes, and that is exactly what
they don't want. The big players would not be able to milk the system and all
the middle class people endlessly, and the golden rule applies: those with the
gold make the rules. Imagine major banks not having a losing trading day for an
entire quarter. All I hear on television is 'trading is risky'.
Yet they win
every single day to the tune of tens, even hundreds of millions per day.
That doesn't seem so risky for them. I heard one of the HFT places hasn't had a
losing day in four years. All of this doesn't sound risky, it sounds
like they all know something we don't know, and are allowed to trade that.
Where's the level playing field? But, until they stop all this and restore
balance to the markets, nothing will change, and the 'flash crashes' will
likely keep coming, faster and bigger.
The interesting thing is, this lack of
participation is as it should be for a secular bear cycle. Recall how they say
the secular cycle, like the one during the Great Depression, drove investors
away for that entire generation. That's part of what makes it a secular cycle.
This one shouldn't have big participation until the next generation comes in,
after a new secular bull cycle starts up, and they see the 'big profits' their
friends are starting to make, and they all pile in. The issue here is lots of
computers, surreal level of liquidity, and essentially zero regulation. Apply
that to a market with almost no other participation, and you've got a recipe
for disaster, in my opinion. So, contact your representatives and tell them you
want this stopped.
I'll cover one item of business, and then we'll move on
to what I think will be a very good commentary. I hope it is because I worked
really, really hard on it. I posted a little note in the 'What's New' section about
something I am going to try. I also will add on notes to the books and
eArticles pages when I try this. Instead of explaining it all again, please
click on that link and read the post for June 5 there. Basically, I am going to
try this starting this weekend, so keep that in mind if you want to e-mail me
or order anything.
I am going to try real hard not to even look at my
e-mails, to not even open my e-mail program, until I finish my break. If I try
this any other way I'll get sucked right back in. So, if you don't get an
answer back to an e-mail, that's why. The same applies to orders. You can
order, but I won't even see the order until I start checking again. If this
works, maybe I have a compromise solution as to how to have a little bit of a
life outside the market and the KT project.
All right,
let's move on. The big issue for me with today's commentary is that so much has
happened, I had to cut out 99% of what I wanted to show, and still I had way to
much to cover with eight charts and the allotted space. So, I did the best that
I could, and based on the charts I have, I think it will still be quite good,
and quite useful. I decided the best thing to do would be to go over some of
the things that we looked at in advance last time, see how they played out, and
have me discuss some of my thoughts on what happened. I'll then end with an
example that is a very common request, and is something I used to do all the
time in here, and promised I'd get back to here and there.
We'll start
with where we left off last time with the ES continuous contract, on the
120-minute all-sessions chart.
Source:
QCharts.com
Here's where we left off with last month's commentary. I
was going to quote extensively, but I think it would be better if everyone went
back and reread last month's
commentary and was familiar with what we covered then. The first point
was that I had a key area, pattern, and setup here where I marked this with the
question mark, and I was expecting a possible reaction either there, or if it
continued down from here, at the D point for a potential ABCD pattern. Based on
structure, if this reacted here at the ? (it would depend a bit on what it
actually did), I would not expect the D area and ABCD pattern to remain valid,
or at least the viability of that could be seriously challenged. I'll discuss
that more in a minute.
Let's look at the same chart, with a bit more data. I'll
also add a few markers onto the chart.
Source:
QCharts.com
The ES did jump right off that area. And where was I
really focusing on once it started? The area of the two lines coming together,
at the upper green mark. The ES couldn't handle that area, and really began to
come off, right to that ABCD area at the middle green mark. In this case the
way the price action developed didn't invalidate the potential ABCD for me as
it sometimes does. (Some of the details of this are covered in the books, and
in much more depth in the mentoring.) It stopped plunging dead on the area, and
started to bounce.
This is where my concepts of 'context' come in. One of my main
uses of 'context' is for filtering. Was I bullish here, or bearish? If I were
short, did I want to get long in here, or use this area to see how it acted at
a potential support area to assist in
management of a short trade? 'Context', what I see and assess from
higher timeframes, guides me in this process. As I always say: "Without
'context' you have nothing." If you did reread the last commentary, I don't see
any way you could interpret my attitude as a bullish one. I fully feel there is
a good chance the 'bull' market ('bull' in quotes for me translates as 'stupid
fake manipulated big bear market rally') ended at that recent 'top'. Now, maybe
it did, and maybe it didn't, but my bias was that the odds favored that, or a
bigger correction than any we had seen so far.
So, how might I use this bias and
the setups? I could be short as this rolled off the C point, and depending on
my timeframe and trade premise, ride the move up off the ? area out and see how
it acted at the key area, and then down into the D point area, and again see
how it acted there. This would be a longer timeframe swing type play. I could
also use the areas mentioned for intraday plays, or even short-term non-ES
plays that may be held for a few days. This could be done, for example, with
SPY options. I could also do very short-term ES plays in line with the price
action from area to area. Hence, the areas provide a 'bias' for me to use for
'context' for the very short-term ES plays.
Now, as I am
watching this it barely bounces and begins to roll over. Not a good sign for
the ABCD. In fact, if you drop down in timeframe you may notice some
interesting structure in that bounce. This is a good clue that the area may
give way. After all, if I'm bearish longer-term here, this bullish pattern
shouldn't play out, this potential CD leg should be more like a 'Wave 3' (keep
in mind, I am not using this Elliott term strictly, but more in keeping with my
'practical Elliott' approach, and taking from Elliott Theory only that which I
find useful to my trading). In the last commentary I had some areas below I was
watching, so one assumption I had was that this may just pass this area up and
head to the next area. This is why I like trailing stops, and essentially
never use 'profit targets'. I'm a trend trader, this is a trend following
methodology, and playing for runners and letting things play out until they
tell me they are done is part of the approach.
It rolls over, then, and hits the
area of the third green mark, right near two lines. This spot is clearly below
my key Fib areas, but it may still be a headfake. I'd be reluctant to trade
from the long side at this point if I were inclined to that side here, but all
is not lost yet, because when volatility expands a lot it is not uncommon for
them to overshoot the mark and try to mess everyone up as much as possible.
From the short side here, though, I want to see what it does. And what it does,
in my eyes, is test the key area from below. That leads to a sharp sell off,
and another 'test', and another sharp roll. At this point on the chart my
thinking is that the short side may really get moving here. If you looked at
the say 3-minute intraday I found the action very clear. There is nothing
bullish to me about this chart at this point right here. I think it looks ready
to fall off a cliff.
Let's add some more data on and see what happened
next.
Source:
QCharts.com
And the 'flash crash' happened. I wish I had the chart
space to show how orderly this was on the 3-minute, and then the 1-minute, as
the 'crash' unfolded. The bottom line here is this went into the mother of all
'Wave 3's' here. This is why I love trailing stops. Forget about how they
erased most of the trades, if the market was 'free' to trade trailing the stops
would be the approach I would want to use. Stay with the flow until the market
says it is done. That's the trend following way.
I'm not opposed to target trading,
it's just that this is not a target trading methodology. It likely can be
adapted for that, but it's not my approach. I frequently hear intraday traders
say they hate trend days. I love trend days. I live for trend days. The
harder the trend day, the more I like it. And my goal is to stay with the trend
until it is over, and then give some back until it proves to me it is over.
Staying with a trend is the most natural thing for me to try to do now. For
most, their very genetics (literally, I believe) are programmed for them not to
do this.
Let's go up to the daily chart, and see how all this looked there,
for some 'context', and to see if anything 'cool' happened with regards to that
chart. I'll show the chart as we left it in last month's commentary.
Source:
QCharts.com
I had three areas below that I wanted to watch. I also
commented that if that tiny little ABCD we just looked at played out, it would
hit near that upper division line. If you look closely at the last five bars or
so you can see the little ABCD (the one that took up most of the screen on the
last chart), and project in your mind how it might complete near that division
line. But just looking at that Jan/Feb correction tells me this could be ready
for something much bigger than that tiny little ABCD. I didn't post this chart
because I was bullish, now did I?
Let's see some of what happened from
here.
Source:
QCharts.com
The 'flash crash' went right to the first area, and just
kept dropping. No interest in that area. It headed to the next area, and
because the time was so short, the line didn't even have time to fall into the
main price area. The price went right to the middle ground between the line and
the Fibs. Was I thinking this was an area I need to watch? Was it sunny almost
all the time when we lived in Arizona, and does it rain almost all the time
here in the rain forest? Some things go without saying, and watching this area
for me goes without saying. I was also watching the area below with the two
lines and Fibs, in case the selling just went insane. Keep in mind, too, as I
frequently say, the chart here is just a framework.
Once the
bounce started, they just went crazy on it, and the talk was that it never
really happened. The trades were erased, all was forgotten and forgiven, and so
on. I wonder why it climaxed at my area, then? Coincidence? Maybe. It then went
up and started to struggle with the upper division line, overshooting it a
little bit, like it overshot a little on the downside. I did a lot of
additional work, and felt this was at a key spot for downside continuation. I
discussed this with various students and in the forum. And do you notice where
it is 'testing' here? Yes, the area it broke down from on the previous charts
we looked at. Must be another 'coincidence'.
Let's see what happened from here,
current as of this writing.
Source:
QCharts.com
The ES rolled right back down to the line and Fib area,
and bounced back up to 'test' the median line (in red) and that middle Fib
level twice before rolling over again. Given the volatility, I'd say it is
moving from area to area, playing ping pong with the areas. I don't know about
you, but I find this framework useful for me to form premises around. And from
here, will it head to that lower area by the green mark? Perhaps.
Maybe it will
retest the middle area again and then up, up to new 'bull' market highs. I
honestly have no idea. All I can do is form trade premises based on my work,
take positions, and then see what it does and react and respond according to my
'Trading Plan'. I can't control the market, and I can't predict what it is
going to do. Just like a poker player doesn't have to predict the next card to
play probabilities, a trader doesn't have to predict the market,
either.
Now, in keeping with the theme of rising up in timeframes and
gaining more 'context', let's jump up to the weekly chart and see how all this
looks.
Source:
QCharts.com
I have two key lines on my chart, and those lines are a
big part of why I suspect the 'bull' may be done. Another reason I suspect this
is it is that it seems every last analyst, forum, and blog that is willing to
say this thing could even go down a tiny bit says the 'top' will be in
'August', not now. I can't recall a time, ever, with so many people saying the
same timeframe for something. And that makes me say the 'top' will be any time
but August. And no one says it could have been in April, so I put these
two together and 'maybe in April here'. Now, I didn't do any additional line
work for this chart here, I just put some major Fib areas together to see where
things grouped. I saw three levels jump out, and interestingly, they are
roughly at 1000, 900, and 800, all big, even numbers, the usual
'magnets'.
Notice the first area is just below the current price,
and coincides with the area from the daily chart, by the green mark. Hmmm, very
curious. That also is a big ABCD at that point, using the 'flash crash' data.
The ABCD is quite clear on the daily chart. It is also possible that the ABCD
completed already, and this thing is on the way up. Take a look at the possible
flat ABCD 'Wave 2' on the lower timeframe, and you can envision how this might
be set up for that. One thing that has me looking at that is that
everyone is talking about the full ABCD at that 1000 level. If everyone
is talking about it, forget it, is my rule.
Recall what
happened on the 120-minute chart, too, when it hit the ABCD that wasn't bound
to hold and it wanted a 'Wave 3' acceleration type move. Could that be setting
up here at that 1000 area, on the higher timeframe? If so, is that 900 or 800
coming in a 'flash'? Could it even come as the bigger 'flash crash' I alluded
to earlier? Who knows, these are just musings, scenarios, things I am thinking
about. It does what it does, and all I can do is respond. I can't predict, and
I don't feel I need to. I can, however, attempt to calculate probabilities. So,
keep these levels in mind if we do see some more downside.
I'll finish
with an intraday example in the ES. I used to show these all the time, but
haven't done any lately, focusing mostly on the higher timeframe setups. As I
explain in this FAQ
here, I feel the methodology is fractal and applies to any liquid issue on any
timeframe (as long as it is liquid on that timeframe). My preferred application
is intraday ES, with the 3-minute traded timeframe. But I look at any setup in
any issue on any timeframe, as long as I have liquidity.
That allows
me to have a very broad horizon, with lots of potential opportunities and
options. Many like the intraday ES, as I do, and most of the thousands of
comments in the forum are about intraday ES trading. So, I will finish with an
example of that. This chart, and it is barely a framework, took me longer than
all the other charts combined. Granted, I had some of that other work already
done, but this takes a lot of time, and that's why I don't do it too
often.
Let's look at the ES on the 3-minute timeframe.
Source:
QCharts.com
I'll make a few comments here, and then get on with the
discussion. I chose an example that I thought was fairly representative. It
wasn't 'well chosen' in my opinion, it was chosen to be average as far as setup
and such. I did choose one that 'played out'. I can show one that gets stopped
right out if anyone thinks that would help them, or one that starts out and
then comes back and stops out, again if that would help. I didn't think anyone
wanted to see that.
This one did 'run', but it also went to the area most
average for ones that play out in my experience, and react, before it continued
the run, so I thought it offered far more educational value than choosing one
that reversed at that point. Finally, I have two basic setups I like. They are
really variations on the same setup, one for 'Wave 2's', and one for trending
pullbacks. I use the latter perhaps 80+% of the time, the former maybe 15% of
the time, and I do other things perhaps 5% of the time. You can't hold me to
those figures, they are just rough estimates to give everyone an idea of my
preferences. This is a 'Wave 2' setup. It's not the setup I use the most, but I
chose it because it had lots of useful aspects. There is no material
differences in the philosophy here with my other setup, only the specific Fib
and line parameters.
I have an area where I think the ES may start to come in
a bit. After starting down, it comes back for an ABCD 'test' of the area. The
ABCD also has an ABCD in its BC leg. I do my workup, and find it has a nice
convergence with my typical Fibs, line, and pattern area (plus a cool 'crazy'
trendline in thicker red). I also added Fib grouping lines on at three lower
levels for use in management (I took the price levels off the lines for
clarity). Notice how they hit at the line areas. They were not chosen based on
the lines, they were chosen using other, unrelated guidelines. I don't feel the
intersection areas are 'coincidence'.
It then gives me a spectacular entry trigger on the lower
timeframe (the actual traded timeframe on this one is about a 10-minute chart,
so entry could be here on the 3-minute, or on the 1-minute, or even on a tick
chart, depending on the technique used). The area I am watching closely to
potentially tighten up my stops, at least on some, is around that first green
mark. That might be considered an 'average' play that plays out. If I feel this
may be a 'wave 3' type of a move this area would be too early for me. Again,
notice the similarity with what we covered earlier? This could have been an
ABCD right there with the traded ABCD just an ABCD in its BC leg. But the
'context' had me thinking a bigger move, acting like a 'Wave 3'.
So, it
bounces off the area to the upper red mark, right at that red median line, and
right down to the next area. Notice the division line (dotted gray line) line
and Fib lines convergence, at the second green mark. Then up to the previous
level for a 'backtest' from below, and down to the lowest area at the third
green mark, where the move finally ended. The larger set line in blue, my Fib
areas for typical 'Wave 3' moves, and my premise, born out of my 'context'
assessment, which includes a lot of higher timeframe work (not shown), had me
most interested in that lower area.
There were many potential premises and
trailing stop management techniques which could be applied here. Which one I
use would depend, to an extent, on what my premise was. I come up with a
premise, and then create a management approach for that premise. The above is a
very typical example, in my opinion, of how setups like these can play
out.
I hope this example was useful for everyone, but especially those
that asked for an intraday example. It really took a lot of work. And, again,
this is just a 'framework', my working charts have a lot more on them. The
point is, either this methodology 'speaks' to you, or it doesn't. If it
doesn't, walk away. There are plenty of other methodologies. And if it does
speak to you, you feel like this is a style you want to study, understand it
takes a lot of work and practice. How much? A lot. It's different
for everyone, what they bring to the table, their work ethic, their background,
and so on. I can't speak to that for each and every one of you, only you know
you.
I have about 36,000 hours at this (maybe it's up to 37,000 hours
now, I'd have to check, and that's still an approximation). Students watch me
work and they are frequently amazed. Well, after all those hours if it didn't
appear amazing to watch me work, well, that would be amazing to me. You
may not need to do that many hours to be able to reach your goals, but maybe
you will have to. If you want an easy way to trade, or want someone to blow
sunshine up your skirt, I have only one answer for you: hit the back button,
this isn't the website for you.
I do my best to try to teach what I have
learned in those tens of thousands of hours. No matter what I offer in that
regard, though, how well someone does in trading is in their hands. In how much
work they do, in their natural ability, in their background, what they bring to
the table, in their desire and ability to find what suits them, what works for
them. I try not to teach 'my' methodology as much as I try to assist a student
to find within themselves what will work for them. I try to teach a person how
to learn and discover their own truth. In that way I am very different.
If you follow
Bruce Lee and his teachings at all (for example, what he said when he was on
'Longstreet'), then you know exactly what I am saying here. It all comes down
to you. Are you willing to do what it takes, do the work, find your path? All I
try to do is assist in that journey. Trust me, the 'way' is not the setup. Any
teacher who focuses entirely on the setup, well, I contend you'll never reach
your goals with that kind of approach. The 'world according to Jim', just one
man's opinion, and that's all it is.
Okay, I've
been going for like fifteen hours pretty much straight, so I've had it. My
hands are totally cramped up, and I'm ready to go outside, even in the dark,
and start my new plan. I expect nothing but incredible market action in the
upcoming month, maybe even a meltdown or two. No matter what happens, I'm ready
to set up my areas and see what it does. And then we'll meet again next month
and talk about it some more, and if all goes well some learning will take
place. You can't ask for more than that, having fun teaching, having fun
learning.
The next commentary will be next month's edition, posted by Sunday
evening, July 4, 2010.
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