Kane Trading - Education for Serious Traders

					January 16-18, 2004 Commentary (weekend edition)- I'm really starting to sound like a broken record. Another day, another new contract high for the ES, NQ and a new high for the move on the INDU. This is just amazing in my opinion, to say the least. This is why I said that I'm assuming 'up' until proven otherwise. I'm going to do some follow-up again today. Let's start with the VTSS trade. In my last column I wrote: "That little pullback/consolidation VTSS was doing was just a springboard for today's upward thrust. My normal temptation would be to scale out of another piece on today's big thrust. The volume was huge at almost 18 million shares, compared to a recent average under 5 million shares per day. Normally I'd be thinking that this was a buying climax, but I'm not so sure. This might be the start of something big. I'm willing to risk giving back a little bit more in exchange for holding a bigger piece while I see if this is the start of something. I had to make a judgment call here, and you can see how I'm playing this." My intuition on this proved correct. VTSS gapped up and just exploded, closing just three cents off the high for the day, up another $.95. The volume expanded to over 22 million shares. This move is just monster. It's a tough call for me in here to decide how to play this from here. On one hand, the play is up just about 43% from my $5.89 entry trigger. That would be a great play right there. But I want to ride the trend as much as I can. If I keep scaling out I'll be capturing nice profits along the way, but I may wind up 'out of ammo' if this thing keeps going. I usually made judgment calls along the way, based on the price action and general market and sector conditions. In this case I decided to scale out of 1/2 of a normal scale out amount. I wanted to scale out on Thursday's thrust, but as detailed in the commentary from that day, I held back. I have that same feeling right in here as I had on Thursday. On the other hand, this run up is so steep. Given all that, I opted to remove a smaller than normal amount of the position right near the close on Friday. Now I wait and see what happens from here. I'll assess the behavior of VTSS, and try to make the best decisions along the way. Let's finish with VTSS with a look at the chart. All that overhead supply gone in a flash. This chart is just amazing. Recall when I first spotted this potential trade, and how much before the completion-point it was. When I saw the double pattern come together with two clear groupings, I was watching this every day. This is the payoff for all that patience. Let's take a look now at FDX. I'll show the daily chart again, with the pattern highlighted and the area of the grouping marked with the two horizontal lines. FDX finally broke out above the congestion, as I suspected, and closed just two cents off the high for the day. Although not as explosive as VTSS, this is a solid move off the pattern/grouping, and I am very happy with how it is progressing. I am still letting this one develop, and haven't done any scaling out yet. Lastly, I'd like to review a trade I posted back in November. I laid out a grouping that I really liked on the daily chart in the ES. The original grouping was on the December '03 contract. Let's look at the chart of that contract showing the grouping and two regression related lines that I had put on the chart way back when. Those that follow my column closely may remember that this one wiggled me out (probably because I set my stop too close for a longer term play), and I had to pick it up again on a second entry. I don't like to hold ES futures overnight too often, and I prefer options of some sort for longer-term plays. Options can save me from a catastrophic overnight move. Let's look at the current March '04 contract and how this has played out since the move off the grouping. I'll highlight the area of the grouping with an arrow. Most of the methods that I use from Kane Trading on: Trailing Stops would still have me in this trade. There was a small scale out for me on the first pullback, and another on that gap and slide day. The next scale out was on the recent small pullback. That last scale out was not triggered by a trailing stop, but by the decision to take some off the table on the next pullback, after such a run. The remaining 2/5 of the original position is trailing along. Looking back now, am I sorry that I scaled out the two times in the early part of the run? No, because I had no idea that the run would be this huge. If that area where I scaled out was it, I'd have been elated that I caught some before it rolled over. If I waited, I may have given everything back. My trading style tries to catch the moves that just go a small amount, while also leaving a reasonable amount of the trade open for the big runs. I like to have somewhere in the area of 40% to 60% (rarely) of the trade open when the trade reaches 'big move' status. That's just my style. I can't say if that would work for anyone else, all I can say is that that's how I like to trade most of the time. Another thing I'd like to point out is that when I have a setup like this I may be playing it in two, or perhaps three different ways at the same time. I was going to say three different timeframes, but that wouldn't be descriptively accurate. I should say 'in three different contexts'. Let me explain. First, I might be hitting the grouping, after an entry signal, with the ES mini for intraday swing trades. Recall that I mentioned how I took the first bounce off the grouping, and then it rolled back down. I like to trade the mini intraday off areas I consider significant. It gives me a 'bias' for my intraday plays. These plays are quick, in and out plays that last some fraction of the trading day, but get closed out before the close. Next, I may play for the first thrust off the grouping, taking that trade off when I feel the first thrust is done. This might take a week or so. I like to use the SPY or the QQQ for trades like this, although I don't use those vehicles exclusively. Finally, if I'm playing for the long haul, I really prefer options. Although a straight call or put may be my choice, I prefer some type of option combination strategy. This would allow me to reduce the time decay factor (what's the trade off?) one experiences with long options. And in all this, many times I use a proxy, in that I may choose an individual issue or even a sector ETF or the like, to make the play. Once you start to use combination plays, the choices are nearly infinite. I am pointing this out here to not only make it clear the various choices that a trader may have (and of course, not all of these choices are suited to every trader), but also to point out that plays I highlight are not necessarily viewed by me as single plays. I may highlight an ES play where my play was to play the mini futures for a thrust on the 3-minute. But I may also have been playing an OEX option for a week-long swing move at the same time. I don't want the reader to get confused when I refer to different plays or types of plays, in different contexts, that may key off the same potential trade area. That's why I discuss so rigorously in Kane Trading on: Trailing Stops the concept of knowing the move that you are playing for. Each different move has me playing in a different way. I hope this gives you some ideas to play around with. With Monday being a federal holiday, the next commentary will be the Tuesday edition.


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