The Kane Trading Mentorship Program
March 7, 2004 Commentary (weekend edition)-
This weekend I'm going to present a very interesting stock that I have been following for quite awhile. It's always a difficult choice, with such a limited column as this, to decide what examples to show. Some people want examples that haven't hit the potential trade area yet. This allows a reader to follow along in 'real-time' as the example unfolds. This approach certainly has a lot of educational value, in my opinion.
The trader can make decisions about how he or she would manage the situation, and compare the results with what I did. The problem is that a good portion of the people that ask for these types of examples are really looking for free picks. They want to know what I think some 'good plays' are. This is not in keeping with an educational theme, and trying to help develop successful, independent traders. For this reason, I keep the examples of this kind to a minimum.
The next type of example is one that has already played out, but demonstrates some significant aspect of the Kane Trading methodology. These are the type of examples I prefer, but they are all past history, and that causes some to think that all the examples are 'well-chosen', using hindsight. So, although I include many examples of this kind, I have to refrain from exclusively choosing this type, even if I think the educational value may be the greatest that way.
Then there are the examples where I just got into a trade and the management aspects can unfold in real-time (as 'real-time' as one can get with a twice per week column). I like to include some of these types of examples, but not too many, as they rely heavily on complete understanding of Kane Trading on: Trailing Stops, and many readers are still following along, trying to decide if the Kane Trading methodology is for them.
So, what do we gain with all this analysis of example types? Well, I want the readers to understand the dilemma that I'm faced with trying to make every commentary educational and interesting. I try to make the types of examples varied, to balance and enhance the educational value. I'm open to suggestions, but I want to maintain a balance, and not do all 'picks'.
I'm giving serious thought to a subscriber service/members section for those who have bought the books and want a more detailed commentary. I've tossed around ideas where it would be somewhat like the free commentary, but with more detail and more potential plays that I am looking at, including more highlighted and specifically labeled groupings. Whether or not I would actually consider doing a service of this type would mostly depend on how many 'regular' subscribers would actually sign up. Regardless, this wouldn't be started until after the two in process books are 'on the shelf'.
Let's get to today's example. I chose an example that has as many aspects from the above discussion as possible, as well as multiple timeframe and context aspects. Overall, it's an example with enough things going on to be half a dozen separate examples, if I chose to present them separately.
A while back CI formed a very, very large ABCD pattern on the weekly chart. The move into the potential trade area was on a huge gap, which isn't clear on this weekly chart. The volume was massive. These are not the kind of conditions that would have most traders looking at a long trade. Let's look at the weekly chart, with the ABCD highlighted. I'll also label something more current that formed on the chart .

Chart 1
I needed to look at the monthly chart before I could render a verdict on the potential trade area for that large ABCD. Let's look at that, and I'll discuss what my thinking was at the time.

Chart 2
This was just a massive ABCD pattern, correcting a very large uptrend on the monthly. CI went from almost $140 down to just over $30. And it hit the completion area on huge volume (relatively, for CI). The factors were in place for a potential trade, and the daily gave a great trigger. The key factor was the S&P 500 being some 150 points straight up off its October bottom when the CI daily signal came.
What becomes interesting is what unfolded off that last trade. As highlighted on the weekly chart above, CI went on to form a smaller ABCD off of that massive reversal point. When I saw this start to unfold, I built a grouping on my weekly chart. Let's look at that.

Chart 3
I liked the look of the grouping. There were .300 and .382 retracements off the two significant peaks, and a 1.000 price projection (AB=CD) in there. There were some other significant numbers, including a nice .886, too. The issue was, what might be the context? Did I want to consider a short trade after a stock went from almost $140 down to almost $30?
Well, CI was over $60 now, and the overall layout looked really nice for another wave down. The ABCD was ending right before it traded into the B point of the larger ABCD. This had all the look and context of a potential trade for me. Sure, there may be stocks to short that weren't so beat down, but those stocks looked strong. This stock looked corrective.
I went down to the daily chart to look for an entry signal. Let's look at what happened. I put two horizontal lines on the chart to outline the approximate bounds of the grouping.

Chart 4
I'd love to say that I got an entry near the close of the last day in the grouping area, but I didn't. I was looking for a bit more significant of an entry signal, and I didn't get it. Here's one case where the 'fade the entry' trader would have hit pay dirt, and I got left behind. Such is trading. I wasn't able to get any kind of 'gap signal' either, like I sometimes do (by this I mean sometimes I get a pullback after the gap, together with a certain set of conditions, that I find adequate to take an entry).
I had to watch this one from the sidelines, after doing all the work. But I started to see something on the weekly chart. Let me add another technique onto that chart, something that I was watching, and using, as the above setup started to unfold.

Chart 5
Most traders will recognize the Andrew's pitchfork. Notice how exceptionally well CI is using the lines. And notice how it dropped off the grouping and went right to the lower line, and then bounced. This has me watching something very carefully. Let's go to the daily chart, and I'll explain.

Chart 6
I highlighted the grouping area with the horizontal lines. Notice how the area fell right at the line. Notice how similar the penetration of the line was, compared to the last penetration of that line. Overall, notice how incredible the lines are in 'guiding' CI's behavior.
Now, one thing that I have noticed is that if an issue goes to a lower up-sloping line and begins to creep and grind up the line when a significant bounce is expected, this is an alert for me. The longer it grinds, the more vulnerable I feel it becomes to getting hammered and being driven below the line. This usually creates quite a reaction, in my experience.
This would also be a potential continuation signal for this bearish ABCD pattern, and a potential entry spot for me. I'm looking for a drop below the lower line, and then a 'retest' of the line. Said another way, a pullback entry that 'retests' the line from the underside. This one will be interesting to watch. Maybe the setup never comes to pass. All I can do is spot potential setups, and then wait and see if they play out.
The next commentary will be the mid-week edition, posted Wednesday. Feel free to send comments about types of examples and a potential members section.
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