Book: Kane Trading on: A Totally New 5-Point Pattern
January 22, 2006 Commentary (weekend edition)-
Wow is all I can say. Just when I don't think the trading action can get any better, it does. For a market that doesn't seem to have any 'retail' traders left, little 'public' participation, and is dominated by 55%-70+% program trading, I just don't think I could ask for more if I tried. I can't comprehend why this market isn't attracting traders in hoards, but perhaps the spell of real estate still has them all captivated. Well, I'm not going to complain, I'll just keep doing what I'm doing, and smiling all the way. That's my observation for the day. I hope you are all finding it as fantastic as I am.
Today I will follow up on last week's Jim's Chart of the Week, and then I'll take something from the members' commentary. I might as well do that while I can, since that service will be ending very soon. There was so much action this week, and I showed so many areas that hit just about dead on that I can't even begin to distill it down for this small commentary. I also showed a slew of different aspects about the methodology and how I apply it, with the goal of digging into the subtle details of what I try to do. That has been a key aspect of the service since I started it. I tried to choose something that shows just one 'theme' for today, and that is reading price action. Understand what I am showing today is just one small, somewhat 'out of context' piece, but hopefully it will still be worthwhile.
I'll start with last week's Jim's Chart of the Week.

Chart 1
I pointed out an area that I wanted to watch closely on the Cyclical Index. Many indices and sectors were hitting areas of interest. The reaction here would tell me what to do, and would give me clues about the market's intentions. As I have said many times, unlike most 5-point pattern traders I do not 'fade' into my entry. I need to have a clear, specific reaction and trigger. This 'fading in' may work for many traders and many methodologies, but mine is based on and built around an entry trigger concept. Without that, it is almost useless to me.
Let's drop to a 30-minute chart, and assess what happened at the area of interest.

Chart 2
The arrow shows the line and area I was watching. I put some moving averages on there to help you guide your eye as far as the 'flow'. I am not using the averages here to trigger me, although I do have some triggers based on that. I am simply trying to show the 'flow' here. The point is, the CYC.X didn't do anything at the area. It bounced a very tiny amount and continued the flow downward. I wasn't triggered to do anything long, and the lack of respect for the area gave me information I could use as I formed my various trading premises, as well as in managing open positions at that time. Fade the entry traders would have gotten stopped right out. Not every area is a potential trade area (PTA) for me. I want something for my troubles, and information is invaluable to me.
Let's move on to a sequence from the members' area commentary:
"Let me quote two things from the last commentary: "For now, I do as I always do, follow the flow, and look for setups. Recall what I said awhile back about when I see some indices and sectors hit overhead lines while others are breaking out to new all-time highs. That's not a time for me to feel a short bias. Maybe after it starts moving down for awhile, but not on a tiny blip off the line." and "And notice how relatively weak the INDU is." I think I left the impression I would not trade the short side, and that is far from what I was trying to say. This is critical to understand, or one might think I was standing aside all day Friday, or trying to pick this thing up long on every new swing-low. This was as far from the case as one could get.
I was pointing out that the 'manipulation rampers' were in the game, and as long as they were, this thing was a powder keg. These characters can go for hundreds and hundreds of points without a break. On the other hand, they create a 'feel' in the market, a sense of urgency and buying frenzy, which they do to suck everyone in, hammer the shorts, and basically make their cause easier for them. When this frenzy feel ends, in my experience, the rampers have quit. I watch for this. Let me quote one more thing I said: "I think the market is at a very dangerous and vulnerable spot, and I think the rampers know it and are guarding it. The last thing they want on failed Iran talks and oil rising is a market implosion. If they 'let go' or can't hold it, the drop could be swift. Keep a close eye on the structure, especially as it hits the areas, of this move up."
The last quote, from Wednesday evening's commentary, wasn't nullified or forgotten by Thursday's action. I just meant, until they quit the only side is long. Fighting a buying frenzy will get me killed. I was very alert to the relative weakness in the INDU, as well as in the S&P and the NDX. They were up, but just not like I would expect. Let's dig into all this and I'll show you how I assessed things as the action played out.
Let's look at the S&P.

Chart 3
The arrow shows where the S&P was at this same time. Notice it was a long, long ways away from that recent high, and hadn't put in an impressive move up like the Russell. Not only that, it came off that .447 and ML area and was battling with that upper //. Recall I mentioned how important this was. This was a clear potential rollover spot. I would not short off this without a clear indication of flow change, and given the Russell's action, only on lower timeframes, since on this timeframe the S&P was still in a clear uptrend. I don't want to get too distracted, but notice the structure of this entire pullback now, and the trendline, lower //, and (deleted for free commentary, sorry) retracement area. This is key to watch now.
Let's look at the ES on the 60-minute chart to see just how clear all this was. I hope you saw this.

Chart 4
The upper arrow points to the area I mentioned before. The next arrow shows where this closed on Thursday. There was a small reaction at the .300 retracement, but it came right back down and closed on that spot, which hit right at that division line. I didn't like that, but I wanted to watch this on the open, and the two other key 'trend retracements'.
If this ramp was solid it should fly off that .300, or the .382 at the least. I would be uncomfortable if a strong ramp went back to the .447 in this case, but still, it wouldn't be a deal breaker. I mentioned I was watching these three areas. I assumed everyone was 100% clear what that meant. This is the same procedure I do with everything, every time. What the ES did with the areas would guide what I was going to do. The ES did do something with the areas, and what I should do was crystal clear. I hope once I show this it will be clear to everyone in here, too, if it isn't already.
Let's drop down to the 13-minute timeframe, and I'll add some things onto the chart.

Chart 5
Now, recall how I said to watch the structure. Although it isn't the greatest, this does have an ABCD look to it as it rose to the high there. I put some flow averages on there. I will say this again: the flow doesn't change because any averages do anything. These are on here to guide your eye as you learn about flow. Never use them without the entire 'context' of the methodology, even to just guide your eye as you learn. The first arrow shows the nominal (read that: tiny) bounce off that .300 retracement. Notice the trendline violation, which happened before Friday's open. I was watching very, very closely on the open. The second arrow shows the opening bar.
This is not the kind of open I wanted, but as long as it rockets off that .382 I'm thinking this may be just a small shake-out start, and the rampers can then go wild if they want. Nothing happened, and down to that .447 it goes, where nothing happens. Now the flow change that is so clear does not look like a very short-term thing here, a whipsaw in the making to trap some shorts before the next frenzy. The rampers are clearly gone, in my opinion. This is 'reading the action', and it is what I mean when I say 'I will be watching this or that area next'. The action here told me how I wanted to work. I hope this was obvious, but if it wasn't that was because it is hard for me to convey everything in such a restricted media as we have here. Now it's clear.
Let's go to the 3-minute, and you'll see just how insane all this was for me.

Chart 6
I recreated the same flow averages for this timeframe, and put all the other things on there, too. Do you see any respect for those two lower key 'trend continuation' retracements? I don't. I see them totally ignored. Do you see any hint at a flow change to the upside since the rollover? I don't. What does that mean for me? I'm short, or I'm standing aside. Now let's look at the true insanity of this day. By this I mean that in the slang way, as in 'this is insane, this is phenomenally great'.
The first arrow is a (deleted for free commentary, sorry) ABCD. I will look at that close up on the next chart. The second arrow is an ABCD, with an ABCD in the BC leg. The third arrow is an ABCD with a (deleted for free commentary, sorry) ABCD in the BC leg. The fourth arrow is beautiful looking ABCD with perfect Fibs. The fifth arrow is an ABCD with a (deleted for free commentary, sorry) ABCD in the BC leg. The last arrow is an ABCD. And is that all that was there, as if that wasn't enough? No, that's just the obvious ones. I suggest everyone look at these on the 1-minute timeframe, as well as on tick charts if you have them. If I can't trade this action, I need to quit trading and go to work at Wal-Mart."
I hope all this makes some sense. A lot of my methodology is based on the synergy of the pieces, and how it all fits together. That is a key reason why I plan to someday move to only selling the books as a package. Originally I thought it would be a good idea to sell them based on various areas of the 'Trading Plan', until I came to realize each piece is somewhat of my own unique creation, and surely the way they fit together, and their interlinking and interdependence, is a critical aspect of the whole. It's this synergy that I feel is so important to the entire methodology. I try to show various aspects in here, and in the members' area I tried to select various themes and stay with them for periods of time. The point is, all the pieces of the puzzle are necessary to the whole.
The next commentary will be next weekend's edition, posted by Sunday evening, January 29, 2006.
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