Book: Kane Trading on: A Totally New 5-Point Pattern
December 17, 2006 Commentary (weekend edition)-
Wow, what a week. There is so much action all over the place I couldn't even begin to discuss it all. Then I remember my 'job' in here, and that is to pick an educational theme for the day and show that, not provide a comprehensive coverage of every aspect of the current market. I pretty much have all that in my head and on my charts, but this isn't the venue for that work. If you really want to know what I think on any given market layout all you have to do is use some of your phone support time as a mentor student, send me your workup, and then ask me what my interpretation and evaluation of your work is. If you keep asking questions you should get a good overview of what my work looks like. Sometimes I even send some charts to show what I am putting on my charts. Point?
I'm trying to teach how to fish, and not give anyone any fish. You want to eat for a day, or for the rest of your life? You know the story. Even the mentor students don't just get my thoughts 'for free'. Best case scenario is they can play detective and try to ascertain what my work looks like. The focus is on teaching the methodology, and not on giving out any 'picks'. We all know I hate anything that could even look slightly like a 'pick'. I do show plenty before-the -fact in here, but only so people can follow along in 'real-time', and see how things shape up, and practice their own decision making process. Keep all this in mind as I show my charts of the week, and in assessing what I am trying to show in the commentary.
For this week I will spend all our time on following up on rates (eight charts!). The action is incredible, and things are unfolding right along the lines of my methodology. I got an e-mail today from a mentor student, and he commented that he is really starting to understand my concept of not marrying a position (or in my way of thinking, a 'trade premise'). I watch action areas, I study what I see unfolding, heavily weighted by my 'context' assessment, and then I 'trade it, fade it, or stand aside'. I don't look at my hard work as a failure if an area doesn't hold. If it doesn't hold I say 'Great!'.
As long as something happens in an area of interest (telling me the area is 'seen'), I feel I have a good shot at a reasonable trade premise. This is all discretionary, but it is not as random or unstructured as it seems. I feel that price action gives a lot of clues, and I simply use those to decide how to go to work on an area. I have been getting a lot of positive feedback on my attempts in here lately to show some of the subtleties of what I am trying to do, so I think the ideas are getting across. This week I will continue to pursue the same concepts.
Let's start out with a 'context' look at how rates have acted in the last two weeks with regard to the key area I pointed out way, way in advance.

Chart 1
Keep in mind that there is monthly and even yearly contextual things going on here. Did you go back several decades and do the work I suggested? No? What the heck are you here for now, then? Stop now, go do it, and then come back and continue. If you don't know the 'context' for this chart, you have nothing. Okay, I see you are back now. Amazing, huh?
So, this area is still producing a reaction. This is my immediate 'context' for what is to follow, but keep in mind the bigger picture on this. If this area fails where will it most likely roll from? If you know the 'context' and the methodology, you likely already have all your scenarios laid out on your chart. I know I do. Do I know what it will do? Nope, I don't have a clue, since I am not clairvoyant. I only know how I plan to act if this or that unfolds.
Let's jump to last week's chart of the week. Recall that the 10-year trades inverse to rates, so just flip things over in your mind.

Chart 2
I wanted to watch for a reaction in this key area of the .382 retracement, 'adjusted' median line set lower parallel, and that 'crazy' trendline from before. So, do you think the 10-year reacted here? I really wanted to show this because of how it unfolded. It's like a 'trick' question. As we move forward, don't answer the question of 'Did it do what Jim suspected?' until you think out your answer.
Let's move forward to the current time with the data, and then we'll assess what we see.

Chart 3
Wow, it sure doesn't look like it did what Jim suspected. Well, that's fine, since Jim seems adaptable and able to find trade premises all over the place. So, is that your final answer? It didn't do what Jim suspected? Before I give you the buzzer that says you are wrong (I told you to think it out first), let me say one thing: what is the 'context' and longer-term premise? See, you should have thought about that before you answered.
If you feel lost right now, never fear. Let's drop down to a 120-minute all sessions chart. You should be using a tick chart if you can do them.

Chart 4
I just added the 'crazy' trendline here and the .382 retracement, with an arrow, to show the area highlighted on the chart of the week. From what I see here, there was a good, strong reaction right off the area. Oh, you think it fell too short and you'd be waiting? Recall the weekly, monthly, and yearly 'context' This is a 120-minute chart, and it 'fell short' a whopping .08 points (.09 rounded). To me, this is dead off the area. Given the larger 'context', what am I watching for? A continued move up in rates, down in the 10-year, for now. Hence, I am looking for areas for this to roll. My trend here is down.
I'll add a few things onto the chart here, and hopefully your perspective will change.

Chart 5
Now what do you think about this area? I even added two small offset lines. And where is that median line from the daily set? If I'm looking for some continued down move, is this a place I want to watch? So far, the 10-year reacted where I expected it to react, as I pointed out in advance last weekend on the chart of the week, and it has reached an area here where I suspect the bounce may be done.
Let's see what happens from here.

Chart 6
In highly technical terms: Swooooosh! Funny how that big news related drop just happened to happen right where I was watching. Just like the run up to that spot started right in an area I was watching. And do you see what it has done now? You all recall the '3-Drives' pattern, right? By itself it is almost useless to me, but with some 'context' it can be one more very useful clue. What am I thinking here? Go back to the higher timeframes, and do the work there. What am I watching for here?
Let's move forward. What do you think is going to happen?

Chart 7
Oops, more news, coming 'out of the blue'. Yeah, Uh-huh. Out of the blue, nothing I suspected at all. But look where it is now. What is the 'context'? What is the bias? How important is this area now? So, my questions to the reader are, what am I watching right here, on this monster ramp up that surely will explode from here, and next, so far, how well is this following what I suspected, or at least, the areas I can see so clearly? Still think that daily chart showed this in its best light?
I'll wrap up with how this finished from here. What do you think happened? It blew the line out?

Chart 8
The 10-year dropped like a rock dead off the line area, and closed near the low, giving all that crazy ramp up back. I wasn't really too surprised by that. Is this some great trading action, or what? 'Context', methodology, dynamic trade premises, it all gives me the opportunity to find places to go to work at. When I look at a potential trade area I do it in the light of a premise, and that guides my management choices. Different timeframes will have me forming different premises, with different management choices. I never get into a trade unless I know exactly what I am at least trying to accomplish.
As I close, I'll mention that this week's chart of the week is for you mini traders. I laid it out like I did for a reason. Do the rest of the line work and see if you can figure out what I am watching, and why. What clues are present on the chart right now with regard to that ABCD? This one should be a good educational example. Finally, keep an eye out for the next two free articles, which I hope to finish up and post not too long from now, maybe this week some time, or sooner.
The next commentary will be next weekend's edition, posted by Sunday evening, December 24, 2006.
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