Jim's Chart
of the Month



Book: Kane Trading on: A Totally New 5-Point Pattern
October 4, 2009 Commentary (monthly edition)-
Another month goes by, and what a month it was for price action, in my opinion. If everything goes off without a hitch next month (what are he chances of that?) then I will be able to show a lot more in the commentaries, as far as different commodities, indices, minis, etc. There was so much to look at in the ES and CL I could write several years worth of commentary just based on cool things I saw in the last month. The issue for me will not be finding things to show, it will be choosing one or two from hundreds of possible choices. There are some fantastic things to show in the currencies, gold, silver, various treasuries, the list just goes on and on. So, I'm looking forward to being able to mix it up a bit more as we move ahead. But, as we all know, any time you make big changes to a system, in this case my data feed and collection system, there are bound to be 'integration issues'...
I'll cover a few items of business real quick, make some market comments, and then we'll get right to the charts. First off, I had a blast during my last 'time off', although I have to admit, I did keep an eye on the market the entire time. I was able to make myself step away from e-mail, book shipping, website work, one-on-one work, and all that, and spend a lot of time outside, which was great. One of the things about this business, as we all know, is that you spend a lot of time indoors, sitting on your backside. Sure, you can work out and go to the gym or whatever, but it's still a very physically inactive lifestyle. There is a lot to be said for spending a week now and again outside splitting wood, digging holes for the wife in the yard to plant things, patching up the roof as promised for endless months, and generally getting some sun on that milk-white indoor skin. I suggest everyone keep that in mind.
Next, I am going to let that webinar idea I mentioned in the last commentary percolate for awhile, but so far the interest level is not even close to what I would have to see to make this worth my effort, so I think this is going to be DOA, as I suspected. It's too bad, those that responded were highly enthusiastic, but a handful does not make for a project. It really chaps my hide, too, to see these services that I feel have little to no worth, and they charge $100, $200, $400 per month, and they have 100, 500, even 1,000 members. I guess when you promise people they will make a zillion dollars and have essentially no losers, and they don't have to do any work or learn anything, just follow along and either ride the vendor's coattails, or learn a simple as 1-2-3 system (or even buy one of the many 'autotraders' they all seem to offer) and you have it made, well, you get a lot of followers it seems.
When some of those followers figure out it doesn't get the job done, well, they leave and new suckers take their place. It's an apples to oranges comparison to what I try to do. I tried to explain my approach in a nutshell with the Kane Trading website slogan 'For those who want to do the work', but that sure is no competition for the dream merchants, who laugh at me all the way to the bank. Do you realize some of these guys are making several hundred thousand dollars a month? If I thought what they provided was truly worth it my hat would be off to them, but I just don't see it. Well, enough ranting on that, you all already know this, or you wouldn't be reading this commentary.
Finally, I've been having some hard-core e-mail issues the past few days. They resolved it finally, only to see it reappear hours later. I have my primary contact address, jim@kanetrading.com working right now after rerouting it, but none of the others listed on the contact page are working. As far as I can tell, the contact form is still working. The 'good' part is that the e-mails are bouncing back to the senders it seems, so you will at least know you didn't get through. Please resend if this happens, and use the primary address I just gave. I try to answer all e-mails, so if you haven't heard back from me and expected to, please resend. Be patient, though, as I do get a lot of e-mail and work a lot of hours, so I can't always reply immediately.
Let's move on to some comments on the market, and then we'll hit the charts. Don't forget the trader tax issue, which although it hasn't been in the news forefront the last few weeks, the French president jumped on the bandwagon in favor of this. I have also seen stories along the lines of him saying that unless the entire world does it, the liquidity will just flow to the places that don't do it, so the whole world should do it. Imagine that. I can't vouch for how accurate the stories I have read are, but that's some of the talk going around. Please, if you haven't done so already, contact everyone you know and pass this on, as well as contacting your congress people. All you have to do is do a search on trader transaction tax and you'll find all the links you need, or just put in H.R. 1068. If you value trading do the work and follow up on this.
Next, as I've been saying the past few commentaries, the economy and the machinations going on behind the scenes are just so insane, so dirty, so disgusting, I can't waste any more space in here going on and on about them. I still think we are in the third inning, and this won't begin to settle down until maybe 2017 or so. The corruption is no longer fathomable to me. The 'rabbit hole' is so deep it doesn't go right through to China, it comes out over there and goes to the far reaches of the universe. If you want to stay up on this maddening stuff, as I said, follow Zero Hedge and Mauldin's blogs. There are some other good sources, but these are a great start.
So, let's move on to some chart work. Hopefully next month I can look at the ES, or CL, or the ZN, or gold, anything new. We'll see. For now, though, I will do another look at the S&P and rates, which ultimately are the same thing as the ES and the ZN. It's just harder to drop down in timeframe and look at anything good intraday using an index. Keep those fingers crossed my transition goes smoothly. If not, then I may have one of my famous chartless commentary, and keep working on the transition. I'm also trying to find a way to incorporate some tick charts, and perhaps even some other charts like range bars, volume bars, and so on. We'll see.
For today I picked a few themes, since as you know, I don't like to just show charts for the sake of showing charts, or showing great-looking setups that play out perfectly. I want to show concepts and teach ideas. As my books and mentoring focus on, the goal is not to give a man a fish so he eats for a day, but rather to teach a man to fish so he eats for a lifetime. I'm always trying to make a point, or show a concept, even if it isn't easy to see right away. Some of my advanced followers may find some of this simplistic, but I have to balance what I show so that I don't lose some of the people that are fairly new to things like assessing price action, flow, rhythm, intermarket dynamics, and so on. Hence, today's themes are going to be about intermarket dynamics and assessing clues in potential setups.
Before we start, to save one or two chart spaces I am not going to show last month's chart of the month in here. Not enough has happened yet to make it worth using up the space. Before you start reading here, go to the top left of this page and hit the 'Jim's Chart of the Month' link, and see the up-dated version of that chart. That will show some of the potential 'context' of the work we will be doing today. I will explain more on that as we proceed.
Let's start with a daily chart of the S&P, stripped down, with just two simple trendlines on there.

Chart 1
When I look at this chart a few things stand out. First, this thing is at a critical, obvious 'support' area. It has 'pulled back to trend'. Everyone sees this. It is 'too obvious'. But something is a little different. Up until now on this manipulation ramp since March every time something obvious happened I saw it posted everywhere, and talked about non-stop on television. Right now I haven't heard pretty much anything on this rather obvious situation. I find this quite curious. Next, I also notice what may be an ABCD in this current pullback. More on that later. Finally, I wonder what would happen if this chart was log-scaled, something I think is important to look at when the scale on the right has a wide range. We'll discuss this more a bit shortly.
When I saw the S&P chart I wanted to know how some of the other indices and such look. Let's look at the Transports on a daily chart.

Chart 2
The Transports, which are up over 90% off their low, are sitting in relatively the same position. They have pulled back a lot more, though, on a percentage basis, than the S&P, almost 10% high to low here, compared with just over 5% in the S&P. But, it has also rallied quite a bit more than the S&P, so all in all it is pretty much in the same position.
Let's look at one more, the NASDAQ Composite, also on a daily timeframe.

Chart 3
Now that one shows a little bit different of a look. It is below the trendline. It also has that same clear ABCD look to the pullback, but it also has an aspect that I noticed in the S&P, too, which we will look at in the next chart. So, how does the NDX look? And the Dow? Well, the NDX hasn't dropped below its trendline, nor has the Dow. The Dow is the most above its line. But what happens when you log-scale the charts? Every one but the Dow is below this key trendline, and the Dow is sitting right on its line. The Dow, too, is the index I consider the least, given is only has thirty stocks in it. So, the market is surely in a position to find some support, or to break down and flush nicely. What scenario might trap the most people?
Here's a few thoughts I have on this. On one hand the sentiment is off the scale bullish when you look at the holistic summation of many sentiment readings. More bullish than October 2007, more bullish than March 2000. One survey/indicator I saw showed that relative to conditions Americans are now the most optimistic in history. Wow, now that's something else. All I hear on television all day is bull after bull after bull. If the rare bear, not even really a bear but someone who simply isn't wildly bullish comes on, they basically shout him right down. I heard a guy today calling for 1750 on the S&P! Another guy a little while back said that this has barely started up, and that we likely won't see a 10% correction for five years! Imagine that! I marked that on my calendar, since I think that may be a key turning point.
So, we are in an area where we might have an intermediate or even long-term top in place. Sentiment sure is lined up well for this. This market is so heavy it really could just fall hard from its own weight. But, there are some flies in the ointment. One, this entire rally was, in my opinion, simply engineered. If you print trillions of dollars and tell primary dealers to run up the index futures, the market is going to go up, period. If you keep doing it, it will keep going up. If you crush shorts by various means, say by buying them in over and over at the most inopportune times, and so on, well, the market goes up. We now have the highest recorded volume for retail daytraders ever. More than before the peak of the NASDAQ bubble in 2000! Soon the momentum just builds on itself. So, have they stopped printing up trillions and pushing it into the market (instead of it being lent out to small businesses and such...)? I'm afraid they are not done. If they want this thing at Dow 20,000, it's going to Dow 20,000.
There is another fly in the ointment, too, and that's the dollar. There is a near perfect inverse correlation with the market and the dollar. Market up, dollar down. This is all part of the process of destroying the dollar beyond any recognition. This makes all this debt 'cheaper' to pay back. It also steals all the money that savers have saved over their entire lifetime. Imagine being able to 'borrow' as much money as you want, and when you run short just print some more up, and then print some more and devalue the dollar so that you can pay it all back with cheaper dollar. What a racket that is. I wish I could do that. So, here's the point. The dollar index (and its key component, the Euro) are at super-key areas right now. The Euro has a monster pattern at a key line area, all the Fibs, it's all there where it started to roll over. The DX is right at its last ditch spot.
Now, for the market to go down, the dollar has to go up, and the Euro down (or the correlation has to break). They want the dollar down. Way down. Crushed into oblivion. They want all your savings, all your money, and they want to pay back the debt with a couple weeks of tax revenues. If the dollar goes down, the market goes up, not only because of the intermarket dynamics, risk appetite, and all the like, but also because the market will just get repriced in terms of the cheaper dollars. So, with all this debt, is there any chance the dollar is going to be allowed to strengthen? Somehow, I just don't see it. But, the bearish sentiment is at such an extreme, and from a technical and fundamental perspective, I could see a nice dollar rally from here. But do any of those factors really matter any more in a totally controlled, manipulated market?
Finally, I hear people talk about how the dollar is a piece of junk and should go down. Well, remember what the dollar index is, it's a comparison of the dollar compared to other currencies. What is a EUR/USD quote? It's a relative comparison of the Euro and the dollar. You really think the Euro is so much better than the dollar? If you think that you haven't looked at the bank and economic situation in Europe very closely. I think they are in worse shape than we are, and they are in an extreme state of denial. I can't for the life of me justify the Euro over par against the dollar, no matter how I crunch the numbers. To me, it's a joke. But the game is rigged, and it is what it is. Point is, again, will the dollar go up here? If it doesn't, the market isn't likely going down. We'll get to how rates fit into all this shortly. And keep in mind, all of what I just said is simply my opinion, my own personal assessment.
Let's move on, and look at the S&P on the 130-minute timeframe.

Chart 4
The first thing I noticed is that the potential ABCD has moved beyond the 1.000 price projection, the 'measured move'. Some ABCD's, as explained in Kane Trading on: Trading ABCD Patterns, do go beyond this point, especially if a key line sits below that area, but if it stretches much more I am going to start wondering if this isn't a 'wave 3', in keeping with the premise that a potential intermediate top is in. My goal isn't to call a top in this monster run up, but to be ready if it does top to start working the short side. I play a side until it breaks, I don't marry a side. I try to read clues and position according to what the market tells me.
I also added onto the chart a few price projections and expansions that show where typical 'wave 3's' and 'wave 5's' may end. I noticed that the basic 'wave 3' area is in the general vicinity of the two trendlines. Imagine a stab below the lines to catch the longs, and initiate new shorts. Then it pops up, and perhaps instead of backtesting the lines it goes above them. Big-time trap. But then it drops in a 'wave 5' type move, and the traps are springing left and right.
Then it bounces up big, and if that was a typical higher degree 'wave 2' in the form of an ABCD, imagine the traps and whipsaws that would create. After trapping as many people as possible, it could then be free to move down in a 'wave 3' type strong move. This is a lot of 'what if's', but every time 5-wave 'wave 1' unfolds at a key reversal spot, and then follows up with and ABCD 'wave 2', this is what happens. Maybe it happens here, maybe not, but it is worth noting because it would open up some potentially great trading opportunities.
Let me add a key set onto the chart that I've have on my working charts for awhile.

Chart 5
Now that's curious. The median line comes right into this ABCD and key trendline area, the lower division line right into the end of the 'wave 3' area, and the key lower parallel right into the end of the 'wave 5' area. Note that I did both of these two different approaches separately from each other and then saw the overlaps. I would be very excited to see this go to the 'wave 5' area at that line, bounce up in an ABCD and backtest those lines, and then roll over hard, as they all declare the correction over. In any event, I have some areas to watch and some premises to work with. There should be some clues in here to evaluate as the price action unfolds. Is one potential premise that this ABCD right here plays out and we see new highs soon? Absolutely.
Let's now look at something in rates, from the 10-year, and assess this in the 'context' of the dollar and the current S&P. I'll show the weekly chart.

Chart 6
The 10-year has a nice-looking ABCD, right into a tight Fib grouping, with a line to line move on this big, key set. Notice the B point right at an important .382 retracement off the low there. But, what are the implications of this setup? Yes, rates going up. Before I was thinking rates must go up, and hyperinflation will surely take over. I still believe that firmly. I just don't see it now. I can't imagine rates going up right now. But let's also look at money flows. Rates up means treasuries down. So far, so good, treasuries are the biggest bubble going, right? But if treasuries go down, money is leaving them and likely going into the stock market. And this is a big weekly ABCD, and hence that would imply a big push into stocks. But I thought my premise was that the market may have put in an intermediate top?
Well, now you see what I am thinking, I hope. Dollar at a key spot to go up. Dollar goes up, market goes down. Market goes down, money flows into treasuries, they go up, rates go down. But this is a bullish pattern here in rates, right? Yes. So, either some usual correlations are about to change (and keep in mind the Fed purchases of treasuries are causing some big anomalies already, like market up, treasuries up at times), or the rates are going to break down, as I would suspect. If rates move down, the market can move down, the dollar up. But, and this is the curious part, rates go down and people buy the dollar??? Can you see just how crazy all this has become? The most important concept for my trading is to be aware of these key areas, what they may imply, and then to watch what the price action does, and watch if the current correlations hold or change.
Let me add some time factors to the chart and we'll continue our technical analysis.

Chart 7
Two key time factors off this ABCD point right to this week right here for the reversal. If this ABCD is to play out, it seems perfectly set up for this. It could be a 'wave 4' off that major low, or a 'wave 2' (my way of counting is a lot different than what a strict Elliottician would do). Either way, this is a key area in here, and if this is more like an impulsive 5-wave down, we may see another record low in rates soon. Wow.
Let me add a modified Schiff median line set onto that ABCD.

Chart 8
So, we have one more timing factor here showing me the same spot. What a key spot. But you know what they say: "The best laid plans of mice and men..." This is so obvious, so nice of a setup, yet the 'context' of all the intermarket dynamics makes we wonder about that lower parallel there. Do the same work that I did with that S&P. Notice the similarity? Do the typical 'wave 3' price projections and expansions, do some more line work, and you can see there are lower areas calling to this thing. All in all it's quite interesting, the position we find ourselves in across the board.
I would strongly suggest doing a comprehensive intermarket analysis, working up gold, silver (I'd do copper, too, as it's the 'China proxy'), crude, the Euro, and some of the other currencies. I have work for the Pound, the Yen, the Loonie, and the Aussie, too. The Euro/Yen is also a good one to watch. Look at how money moves and flows from one area to another. Look at the setups and see what they imply, then reassess as various areas play out, or give way. I think we are at a critical juncture, where money printing is going to be tested against fundamentals, sentiment, even technicals. We live in an interesting, if not infuriating time. But it is a very, very good time for trading, in my opinion.
I hope everyone enjoyed this commentary and got a lot out of it. I try to mix up the ideas and concepts, and not just show purely chart analysis every time. I will get to more detailed chart analysis in the upcoming commentary if I can get the data in. But let's not skip over some of the thinking aspects of trading. Not everyone is solely a mini scalper. I have a lot of followers who concentrate on futures, and have higher hold times, from days to weeks, or more, as well as intraday traders.
The most important thing to take from this is not what timeframe or issue you trade (as I've said, I feel this methodology is 'fractal' and applies to any issue on any timeframe, as long as it is liquid), it's to be a 'thinking' trader, trying to assess various situations, read clues, and come up with viable working trade premises. Yes, one can overthink it, but on the other hand, I think one can 'underthink' it, too. I'm looking for that nice middle ground.
The next commentary will be next month's edition, posted by Sunday evening, November 1, 2009.
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