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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.
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.
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.
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.
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.
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.
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.
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.
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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