The Kane Trading Mentorship Program
March 21, 2004 Commentary (weekend edition)-
Today I'm going to continue to look over some of the trades, and potential trades, that I have been discussing. I will add as much 'trader talk' as I can to the commentary, to give the reader an idea of what I am thinking. It is a lot more difficult than I thought it would be to post the commentary only twice per week, because it's hard to be timely on just about anything, unless it just coincidentally happens that a critical point falls near 'commentary day'.
On the other hand, I'm making steady progress on Kane Trading on: Multiple Timeframes and 'Context'. I've decided (at least, that's how I feel today) that I will release MTAC as soon as I finish it, and then get to work on Kane Trading on: Trade Management. I was planning on releasing them both at the same time, working on both until they were done at about the same time. I have decided to just concentrate from here forward on MTAC and then once that's out, shift my focus to TM.
I've decided to do this because it's just too hard to bounce back and forth between them. I wanted to release them at the same time because I have been moving the release of TM out further and further as I struggled with finishing it, having focused on the daily commentary so much. It seemed incorrect to me to release MTAC before I finished TM, but I didn't want to wait until TM was done to start MTAC. Remember that I finally decided to start MTAC because I was getting so many requests for that information.
The bottom line is that I plan to work myself into the ground (like I don't already?) to finish MTAC as soon as I can, and then take a more normal pace wrapping up TM. I still hope to do that by the start of summer, but we'll have to see, as so many unexpected things can come up.
Let's move on to some charts. I'll start with a 15-minute chart of the cattle trade. This one has been something else.

Chart 1
To refresh your memory, the horizontal black lines represent the approximate bounds of the grouping/pattern completion point that the trade was based on. The arrow points to the general area of the 1.000 ABCD down that I saw forming off the potential trade area. I mentioned that as 'something to watch', since it can be a red flag to see a corrective pattern emerge in what is anticipated as an impulsive direction. (Even if the move off the pattern completion point were anticipated to be a corrective move such as an ABCD, the first leg, the AB leg, would be 'impulsive' in nature, not 'corrective'. This type of stuff will be covered extensively in MTAC.)
As can be clearly seen, the smaller pattern failed and cattle have continued to move off the pattern completion point. I sure am glad that I built my grouping around my .886 retracement number. The B point was the tip off. This trade is now in the 'management phase', according to my 'Trading Plan'. Notice the congestion to the left of the current price action. Understand, though, that this chart is two timeframes down from the 'traded timeframe', which is the daily chart.
I try not to attempt to micromanage trades way down in timeframes, as that almost always leads to getting chopped up. I frequently watch the action on lower timeframes, but mostly to see if I can learn anything, and not to micromanage. It is interesting to note that the price is now at a .382 retracement off the CD leg of the pattern.
Let's move on to SUNW. Recall that I have been watching the area around $4.30, waiting to see if SUNW overshot my area and was then going to start an up leg, or if it was going to test the area from below and give a shorting opportunity. Let's look at a close up of the daily chart.

Chart 2
As it turned out, it seems to be the latter. On the close on Wednesday I wasn't sure what would happen. On Thursday SUNW gapped down, turned up the close the gap to the penny (the daily chart appears to have a bad tick), and then began to roll over. It was crystal clear to me at that point. SUNW has continued down from there. This is another trade in the 'management phase'.
I think it is likely to follow the market direction to some extent, so if the broader market starts up, I am anticipating a bounce. If the market tanks from here, I expect it's more likely SUNW will continue this breakdown. I don't use that to manage the trade, I only use the price action from the chart, but I like to think out loud when I manage a play, too.
Next, let's look at CI. I have been thinking about this one quite a bit lately. I'll start with a chart showing what has happened since my area of interest came into play.

Chart 3
I was hoping to get a break of the lower medianline, and then a retest from below. Recall that the area highlighted by the horizontal lines was my potential trade area. I wasn't able to get an entry due to the gap, and I was looking for another way to use the setup. CI never gave me a chance, as it didn't break down below the line to any significant degree.
I mentioned that I was wondering if I shouldn't have been thinking about a long trade. After all, CI was a full eleven dollars below that trade area. As I kept a watch on this one, I noticed something interesting. Let's look at another daily chart on CI.

Chart 4
I noticed the very similar behavior in how CI reacted to the lower medianline. I also noticed the time similarity in how long that process took, give or take. Lastly, CI retraced back to the .618 in this process, within two cents (on a stock priced over $50). Now, you tell me, was the higher probability event a breakdown some eleven dollars below the short trade area, or the lower medianline, with the time symmetry and the .618 retracement test, long trade?
The next question is, does a bearish ABCD form here? Will that lower medianline give way if that plays out? CI has a lot of interesting potential setups forming. I do think that I was so concentrated on the failed lower medianline scenario, and waiting to see if that was going to set up for me, that I missed something that I think should have been obvious. I feel that I should have been long off that .618 right now.
Let's wrap up with a daily chart of the NDX.

Chart 5
The NDX just can't get off the ground with respect to this grouping. It has made several valiant attempts, but it just can't get going. I don't consider it bullish the way the NDX is acting in here, but I have seen this happen before, and then off it goes. Recall the trade I set up back in November of 2003 on the S&P. It behaved quite similarly, and then finally rocketed off, making a huge run after that.
The grouping on that S&P trade setup was violated slightly multiple times, and the S&P see-sawed up and down in there for what seemed like forever. I got shaken out a few times, but kept trying. I point this out because although this looks extremely ominous, I've seen setups like this play out exactly as anticipated. On the other hand, I'm watching for a breakdown.
Let me see if I can explain what I am getting at here. The trend has been down, and that's clear from a quick glance at the chart. Hence, my emphasis has been on short trades (despite the perhaps unbalanced cross-section of trades that I have posted in the commentary). I wanted to point out, though, that we are in an area where things might change. I want to take that into account when I consider new trades, and in my trade management on existing trades.
The behavior in the area of this lower grouping demonstrates to me just how important this area is, and that I was on track taking it into account. A big battle is going on here, and the immediate future action is going to be decided right in here, in my opinion. What I was pointing out was not only how I was looking at this area as a potential turning point and potential trade area, but also even more so how critical this area is for future action.
This is not a 'market call' that I can be 'right or wrong' on, it's a critical area that I want to watch, and the action that has already transpired has proven to me that I was correct in my assessment of the importance of this area. That's the most important thing here.
I am still holding on to the AMZN long play. I would prefer it not just sit there and do nothing, but it's doing it when the NDX is closing on its low, so it is relatively strong. I will watch what it does if the NDX breaks below the lower grouping. All I can do is let my management plan unfold.
SCH is very disappointing. It keeps trying to bounce, but then it rolls over. I am also letting this one have some room, but my 'gut instinct' tells me to close it. In my normal style of play I would be gone on this one, but I'm experimenting on some plays with trying to give them more breathing room. Trying to confirm, once again, that in this market my 'jumpy' style is, in fact, the best way for me to go.
The next commentary will be the mid-week edition, which I will post on Wednesday. Get ready for some action, as I think we will be seeing some soon.
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