The Kane Trading Mentorship Program
July 7, 2004 Commentary (mid-week edition)-
Well, it seems that the comments in my last commentary on program trading were quite well received, if my 'e-mail indicator' is accurate at all. I guess there are still quite a few mini traders out there after all. I must admit, the FX trading has just been very, very good lately, and it's hard to find the motivation to watch every tick of the mini day after day. (I know of several traders who have now taken to staying up all night to trade FX, and I'm tossing the idea around myself.)
To get around some of the program trading noise I try to really keep an eye out for the larger timeframe setups. When I see something on the 13-minute chart I pay particular attention. This allows some of the 'noise' to become small enough, on a relative scale, to not interfere as much with my trading. Let's look at something I spotted on the ES 13-minute chart today. I called this one live, in advance, in the chat room today.

Chart 1
The trend was clearly down, and I was looking for a chance to get short. The ES was forming a nice ABCD pattern, with three clear groupings, the outside two based on my favorite alternate ABCD setups, the .886 and 1.128 alternates. There are a lot more numbers coming together in these groupings than are clearly visible on the chart. But I also noticed something else I wanted to focus on. Let's add that in.

Chart 2
I noticed we had a really clearly defined lower boundary to the trading from Thursday and Friday. I put on a horizontal line for Thursday's low. It fell dead on the 1.000 grouping. I now knew the area I wanted focus most strongly on. Understand, although I am watching three distinct groupings here, these groupings are all still within under a two point total range. This is a very tight area.
What the 'layering' of the groupings is doing for me is telling me the issue is behaving very 'harmonically' here. It has the quality of 'harmonicity'. If you haven't read my free article with details on this, please do. This 'harmonicity' increased my confidence to consider a trade in this area. At this point I dropped down to the 3-minute chart to look for entries, and I was also watching the 1-minute chart for behavior.
Before I show what happened, I'm going to ask a trivia question. I'm sure all my faithful readers will get this one in two seconds flat. If you don't get it, you are missing out on something that I find very useful. Okay, here it is: what pattern is the arrow pointing to?
It's a classic 4-Point Continuation Pattern, developed exclusively at Kane Trading, and made available via an eArticle or in hard copy version. This one moved 17 points from point 4 of the pattern to the end of the run. It's an absolutely fantastic pattern for my trading.
Let's move on and see how the ES reacted to the ABCD pattern/groupings.

Chart 3
The ES dropped like a rock right off the focus area. I can't ask for more than this. This potential trade came right near the end of the day. Since I don't personally like to hold futures like this overnight, I closed out. I would not have closed out if the day weren't over, as I expected this had more to give, and my trailing stops still had me in most of the play. (As an aside, see any pattern in the action right before the close?)
But then something interesting happened. YHOO reported after the bell, and the market didn't like it. I don't care what they reported, be it better, equal, or worse than what was 'expected'. All I care about is how the market is reacting. Let me cite a line from 'Reminiscences of a Stock Operator' by Edwin Lefevre:
"...any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance."
What direction is the flow here? Let's see what happened after the bell. I'll show a 3-minute chart with the aftermarket data.

Chart 4
The first arrow points to the area of the groupings, where I made the short call in the chat room and made my play. The second arrow points to the regular trading hours market close. To me, this chart shows the market's intention when it came off that grouping area.
The details of the trading day required me to get out way before the market had done its thing, but that has little to do with the technique I used to spot this potential opportunity. It only has to do my particular 'Trading Plan' and its parameters. This chart shows what the technique itself offered me.
Like I keep saying, the ABCD pattern, as I lay it out in Kane Trading on: Trading ABCD Patterns, is my 'bread and butter' technique. It is the main thing that I am using in my FX plays. Not just any old ABCD pattern, though, but the unique variations and twists that I came up with and laid out in the book.
The next commentary will be the weekend edition, posted on Sunday.
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