Book: Kane Trading on: A Totally New 5-Point Pattern
June 3, 2007 Commentary (weekend edition)-
Now, you can't say that wasn't some amazing trading action since our last meeting here in the commentary, can you? Wow, that is some action. This thing has every classic sign of a blow off top I can think of. But it never seems to stop going up. I heard that in China they are now opening 300,000 new brokerage accounts per day. Yes, you read that right. They are taking second mortgages on their houses, and maxing credit cards (despite the stereotypes we have here in America, they do have credit cards and mortgages over there), and using that money to trade, mostly in 'cheap' stocks. Not invest, but trade. The turnover rate is about seven times as high there now as we have here. Again, this is based on the information I heard on the idiot box. Now, does all this sound familiar?
As I've said, and many other people have said lately, it will likely take some shock event to end this bull. No bull lasts forever. But that's not my worry. I will reiterate my prime concern, and then we will get on to the charts, the latter of which dovetail right into what I am about to say. My concern is the 16-18 year cycle (17.2 on average by the techniques I use, as I have stated before), if it were to play out as it has many times before, has us set up much like right before '73-'74, where the market was previously just about cut in half and then rose to new all-time highs, and then just about cut in half again. There wasn't a single bear in the crowd when this happened, by my reckoning. Same as now. But '73-'74 was an era of rising rates and oil shocks. Hmmm, wait a minute.
Nobody sees the potential for an oil shock now? Hurricane season just started. Look at that RBOB unleaded chart. We are now at all-time pump highs, even adjusted for inflation. But we haven't had any hurricanes hit in the gulf, and there are no geopolitical explosions. Iran is totally defying the UN, and is ramping up uranium enrichment full throttle. The head of the IAEA said the U.S. and Iran are headed for a major conflict if they can't make some progress with the negotiating. I'm not a news agency so I won't go on with all the military exercises and carrier movements and so on, or whether or not Israel will allow Iran to go nuclear without a pre-emptive strike. I will simply say, you don't see the potential here for an oil shock?
And let's briefly look at rates. If you did the 20-25 year chart I suggested awhile back, you see the trend channel. My monthly chart only shows the very end of this, with the latest reactions. You have to figure when you hit a new low in rates (or anything cyclical) that is greater than anything from more than the previous forty years, perhaps that's a low that may last some time. If this area we are approaching now 'goes', then it will be a break from the channel. That's no guarantee, of course, that it will 'V-bottom' and start a new trend up, but it may. It may just chop in a range for years, 'basing'. Or it may spike up, and then roll right back into the channel, 'head-faking' out. It could do anything. The point is, rates are at a critical spot where a multi-decade channel may give way. Can you see how rates might be ready to rise?
My point here is not that a big bear market continuation may be about to start. Perhaps the bull lasts forever and ever, just like in a fairy tale. Maybe this time it is different. I just want to show that some factors are in place for the cycle to play out in a similar manner to what has happened in the past. I just don't want to get caught off guard because the world is caught up in bubble-mania, and pretty much all I see on television is more and more encouragement to join in, just like I recall in late '99. That was the last time I recall hearing 'it's different this time'. So, watch those rates, watch those currencies, all of which look ready to explode to new highs, further driving the dollar to new lows. I have no idea how this will all play out, but one this I do know for sure is that the stage is set for some things to happen. Now we see...
Before we start let me mention one little 'aside'. Since the last commentary book sales have been the best that they have ever been, exceeding even the previous month, which was a tie, I believe, with my best month up until that time, if I recall correctly. So, sales have been really strong since I went to the once per month commentary. With another month of data now, I can see that any worries I had about a negative effect from cutting back on the commentary were ill-founded, and things are fine in that regard. And I'm having a lot more fun with my extra time, spending it wisely with family. All in all I made a good decision, I think.
Let's do a little follow up on last month's chart of the month in KKD, and then we'll look at rates.

Chart 1
Here's where we left off last month with KKD. This is the same chart, basically, as I used for the chart of the month, except I cleaned it up a bit before I posted it there. I wanted to leave on all the work so I'll use this version from last month's commentary. Recall the potential short setup I showed at the downsloping set's upper parallel at that .382 there. It rolled right down to the key area, where it closed weak and showed little respect so far for the area. My thinking, in a case like this, is ride the short if I am in, and see if there is an entry trigger for a long. If not, stay with the short.
Let's see what happened from here.

Chart 2
KKD just kept rolling down from there, finally stabilizing, and actually forming a bit of an ABCD right under the key area. I was asked in the free forum if I had any areas lower that I was watching. I will leave this as an exercise for the readers, but I will say, there is another set line just under this price action here, and also notice the potential ABCD structure to this entire downmove.
All in all, though, if you look at the entire layout you should see why the area we have been following was of serious interest to me, and why I am less interested in the lower areas, at least for now. This was a case of if KKD could 'pick it up' in the key area I felt that was significant, and if it didn't, it may not have enough to keep me interested. Do some work and see for yourself what you think of the areas below, including the one just about right here.
On to rates. Let's go back to the monthly chart from two commentaries back.

Chart 3
Rates had come back to an area where a bounce was something I was watching for. They had bounced up, and then came back in and 'tested' the area again. Notice that this was the first move down off a major ABCD off that upper parallel, which is a line going back some two decades, in essence. So, this is the 'context' for the weekly and daily work I have been showing.
Let's see what has happened since then.

Chart 4
Rates have moved right up off the area. Keep in mind that the last bar is the new bar for June, and contains just one day of data. You can see the potential ABCD structure in this move, as we discussed last time. Notice how this is approaching the upper parallel area again, in what looks like a very bullish attitude. But is this potential ABCD a 'wave 2', after a 'wave 1' thrust down from a year ago? If this big bearish ABCD and two decade line 'blows out', what does that mean?
Let's drop to the daily chart, where I'll show where we left off in the last commentary.

Chart 5
We left off with rates coiling like crazy on the daily chart, but also forming a potential ABCD, too, in the coil. I had a few small areas of interest above, as I highlighted and explained last time, but the key area was at point d, getting close to 5% yields. Recall how the talking heads are always saying 5% is a critical area for the markets. There was no guarantee the coil would break to the upside, as I had also discussed scenarios where a bigger ABCD played out by going straight down from here. All I am able to do is react to what happens.
Let's see what happened from here.

Chart 6
Somehow I suspected that was coming. There were no reactions of great note in that middle area, and rates are now right at the 5% area. An ABCD right at a key line is now set up, and that ABCD, one of the scenarios I laid out way back, could be an ABCD in the BC leg of a much bigger ABCD.
Let's look at this on the weekly chart. I'll start with the weekly chart from the last commentary.

Chart 7
This was one of the scenarios I had outlined quite awhile back. An ABCD at point d might be an ABCD in the BC leg of a bigger ABCD, with lines all over the place to support such a premise. Then rates may drop right off the bigger critical area and head down to the 4% area. And all this has some serious 'context' to go with it.
Let's see how it looks right now, and then we'll discuss that 'context'.

Chart 8
The smaller ABCD is coming together on the weekly chart, as well as the daily chart, as far as overhead lines. Recall the monthly chart, and how that overhead area is right in here, too. If this rolls down in here, the talking heads will say 'See, rates backed right off of 5%, and things are great for the stock market.' The stock market may really like all this, if it plays out, with the rah-rah cheerleaders yapping it up big time. A final blow-off may then ensue.
If so, the bigger ABCD could come together, set up to blow out the key overhead upper parallel area on the monthly chart. Why does this seem like a potentially feasible scenario to me? Because it would catch a lot of people by surprise, and it would play perfectly into the hands of the talking heads. It would allow them to draw in even more money, only to see it vaporized. That's what happens in a blow-off top.
Or maybe it blows out this ABCD here and just takes out the big area straight away. I don't see that as a high-probability scenario, not without a springboard (watch for a small ABCD pullback) to get through there, but it may. I don't make predictions, I just lay out scenarios, and watch reactions at various key points. I try to construct viable trade premises around all this, ones that I feel have an edge. Whatever happens, this is going to be very interesting, and it sure is in a critical area.
I don't have a lot to say as far as concluding remarks, except watch all the currencies very closely, watch energy, metals, and grains, too, as you watch rates. I think all these will tell you more about the stock market than the stock market itself will tell you. No matter what your taste in trading vehicles is, it seems like there is plenty of action out there. I suspect we are in for some really historic times, and I think we are in the midst of something here we may look back on for a long time to come.
The next commentary will be next month's edition, posted by Sunday evening, July 1, 2007.
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