September 6, 2009 Commentary (monthly
Well, another interesting month goes into the
record books in the trading world. I've seen and heard things among the pundits
and others on the idiot box that I never thought I'd hear. I guess human nature
really never does change. Crowd and herd behavior dominates, and many, if not
most, people you see have a hidden agenda. Most are shills for 'the system', in
my opinion. I guess when the very station you are watching is owned by a
multi-national corporation that is a big part of the problem you'd be quite a
fool to think you'd get an objective viewpoint on that program. This is a
lesson I am just coming to grips with myself, after all these years.
I guess I've
always been somewhat of a 'sucker' in the sense that I believed in these icons,
these pillars of the community, both the financial community and the community
at large. As time has marched on, and I saw what was unfolding before the
crisis and since then, I started to realize we are being snowed. Since then I
have followed places like Zero Hedge and Mauldin's blogs (which I recently
linked for your convenience on the links
page), and now I feel I'm all too painfully aware of what is really
going on. And even with such sources as these, I wonder how much is still
hidden from view. All I can say is it's a disgusting mess, it isn't likely to
end well (I think we are maybe in the third inning right now, not the bottom of
the ninth as the rah-rah I have an agenda cheerleader pundits say), and is a
sad reflection on human nature and corruption. But, alas, it serves little
purpose in here to go on about this. Read the material out there and you'll be
on the same page as I am.
Let's change the topic and get more cheerful here.
Despite all the lunacy that is happening in the financial world (and the world
at large), I see very little difference in the trading setups. As markets
evolve one always has to adjust in subtle ways to 'tweak' the 'Trading Plan' to
stay in tune with the changes, almost like a doctor continues to go to
conferences to learn about the ever-changing treatment methods as they develop,
or an airline pilot has to adjust to new developments in instrumentation.
Overall, though, I think the market is still trading fantastically. The ES is
still making a lot of moves in the overnight GLOBEX and in the morning session
(and sometimes in the engineered afternoon ramps), and going dead for long
periods, and CL is still just a monster for trading. Let's see if that
changes at all as fall gets into full swing.
Before we move on to the chartwork,
I'll cover multiple items of business, and then some market discussion. Then
we'll take a look at what we have on deck for today. To start, did you see the
new title on the top of this page? I finally did the new title image, changing
it from the long outdated 'Daily Commentary' to the more appropriate 'Monthly
Commentary'. Not a big deal, but if you saw what I have to go through to do it,
you'd understand why I play it up like it's something. So, just humor me on
Next, I wanted to mention that the 'trader tax' is coming back into
the limelight, this time with the backing of the AFL/CIO (what would the
AFL/CIO have to do with taxing traders???). I won't rant and rave about this
here, as I've mentioned it in the past already. If they keep trying and trying
on this one I worry that one of these times it is going to pass. And you all
know how it will happen. At the last minute the powerful lobbies will convince
them to allow exemptions for the very places that caused all this trouble, and
it will basically apply only to small traders. Understand, they are talking
about a tax of say $400 round turn on 1,000 shares of a $100 stock. This is win
or lose, every trade, assessed at the brokerage when the trade is made, like
commissions are. So maybe you pay $10 commission total for a buy and sell, and
$400 tax, and by the way, if you make a profit, you have to pay tax on that,
If you don't think this can happen, you are risking your career on
that opinion. Please get active, do a search, and sign all the petitions and
write all the letters you can. On top of all this, if they ever did pass this
in the current form, liquidity would dry up so bad that the markets would be
destroyed, in my opinion. I have seen comments by exchange officials who feel
the same way. All in all this has to be one of the worst ideas I have ever
seen. In all forms I have seen it would also be applied to futures contracts,
based on the full value of the instrument, not your margin amount, so it could
be equally devastating there, too. Seriously, get on this.
Moving on, it
looks like I will be implementing the new data feed by the November commentary,
if all goes as planned. If so, I will be able to finally start to mix it up
more like the old days. I can get back to showing the mini's, futures of all
sorts, so we can look at treasuries, gold, currencies, grains, crude, and all
that type of stuff, as well as some other things I haven't been able to get
lately because of all of the interface issues. Hopefully this will all
transition without a hitch. If so, it should make for a lot more variety in the
Now on to something positive for Jim. I am going to
paraphrase from my July commentary, with a little adjustment for the current
I really need to take an 'end of summer break' while our
weather is still so nice, and I'm going to do it this upcoming week of
September 7th-14th. I plan to do the same thing I did last time, just take a
week off and play around the house. Work in the yard, go golfing, actually
watch some non-financial television maybe, just take a break from computers. I
will still be around, but if I check e-mails, watch the market (yeah, I will
probably still monitor the swing plays...), and so on, I'll just never take a
break. I only mention this here because for that week or so I won't be shipping
any book orders out, or even checking for orders. If you want to make an order
please do so this weekend (September 5th or 6th), or wait until after I return
on the 14th. I posted a note on the top of the books page, too, as to when I will be
'out of the office', so you can use that in your timing decision.
on to my last order of business. I've given a lot of thought to a new idea, and
spent more than a few hours putting together a page on this so that I don't
have to clog up the commentary with details. If you've bought the book set and
might be interested in attending a Kane Trading webinar, please
check out the page I've created by clicking on the link here. It's all
explained there, but before you get your hopes up, right now I'm just tossing
an idea out there and looking for some feedback, and then we'll go from there.
I hope everyone checks this page out, as I need all the input I can get at this
Now, with all those items of business out of the way, I want to
discuss a few market items before we get to our chartwork. I haven't went back
to that UNG chart that I showed awhile back. This was the 'long-term play'
based on some of the fundamental aspects of natural gas, and the extreme ratio
of crude to nat gas, among other things. Well, as you all know, nat gas has
broke hard to the downside, and UNG seems to be having issues of its own. I
have heard talk of the fund having to close out some of the position (after
having reached their speculative position limit), and even of the fund closing
entirely and reopening with a different structure.
This is all
far more than I can fully cover here right now, and it has made for some
interesting speculative discussions with my trader buddies. The bottom line,
though, is that even if any trading position was initiated in the basing area
shown on that chart, it would have been stopped out by my plan when that low
was breached. If this was taken as a 'long-term investment play', and that
1.272 I mentioned it seemed destined to test was used as a line in the sand for
some 'dollar cost averaging' (as a trader that term makes me wince), that play
would have been stopped out when that 1.272 area gave way, by any plan I would
Notice, too, there was no decent entry trigger at that
1.272 area, so I don't think any additions would have been warranted
regardless. So, is nat gas done going down in here? Is this the basing area? Is
it going to rocket up from here, or do that much talked about one handle? All I
can say is nat gas at this price, with respect to the energy complex and all
other factors, is perhaps the oddest anomaly I have ever seen as a trader,
despite all the fundamental reasons they give to justify it.
Let's look at
some sentiment, and then it's chart time. The insiders just keep on selling,
exploding the record insider sales ratio to 61.8 to 1 sells to buys. They have
sold at a furious pace for the entire run up, starting right off the low. It is
amazing how little press this gets on the rah-rah stations. So, I thought
insiders accumulate as the bottom is forming, and distribute into the formation
of a top. Now, in this 'bull' market they distributed starting at the bottom,
and all the way up. From what I've read this has never, ever happened in a bull
market in history.
Hey, maybe that stat is incorrect. Maybe some bull
markets are the exact opposite of that. Maybe the buying demand is so great
that the insiders can sell at unprecedented rates, and the buyers can absorb
all that and want more, such that prices just keep rising the demand is so
strong. But wait, if the demand is that strong why would so many insiders want
to sell so much so soon, instead of waiting for the top to form, which we have
been told is way, way, way up from here, and then sell for a lot more? Hmmm,
seems like the insiders don't have a clue. They are the 'dumb money'?
So, let me
give one other stat. Keep in mind the accuracy of this is only as good as the
accuracy of what I read when I first saw it, so take it with a grain of salt,
and do your own research to confirm any facts you get. I heard the entire
market cap since the March low has increased $2.7 trillion. Of that $400
billion has 'come off the sidelines' from sources like the money market. But
here's the curious thing. In that same period of time the FED balance sheet has
increased $2.3 trillion. Hmmm, very curious, when you add those up, you see an
interesting thing, don't you? Nah, must be some kind of coincidence. And this,
while bull sentiment has now reached a level greater than in October 2007. It
just gets 'curiouser' and 'curiouser', now doesn't it?
move on to the chartwork. Today we will look at some overhead areas based on
line work. As you all know I never try to pick tops or bottoms, as it is
completely unnecessary for trading, in my opinion. I chose to look at this
today for two reasons. First, it seems to be all that anyone talks about
nowadays on television and even in forums and blogs. And second, I want to
review my general approach to 'context' and staying with the trend. I thought
this would be a good chance to look at both of those and study some interesting
areas and line work.
Before we move on to the current market position, let's
do a quick review of last month's chart of the month in rates.
Here's that rate chart as it was posted last
month. I was watching to see of an ABCD pattern might form, perhaps as a 'wave
4', to send this for another leg up. I put one arrow on the chart at that red
sliding parallel, because that was a key spot where it may start up instead of
making a move for point D. I also highlighted a key trendline, which is also an
important line to watch. There is no way I can highlight everything that I am
watching on a single, small chart like this, so I try to pick the most obvious
areas. Once price action forms additional structures then I have to update the
potential premises. I do the best I can to show areas that I want to keep an
eye on, though, with the hopes that the logic and reasoning for how I came to
watch those areas will become more and more obvious.
what happened. I'll move some of the labeling, and add a few things onto the
Rates did 'see' that red sliding parallel at
the leftmost arrow, and they snapped up nicely off that area. They formed a
nice corrective structure up to a higher potential C point, the labeling for
which I adjusted on this chart. I didn't show it here, but draw a
trendline/sliding parallel over those swing high points between the B and C
price action. Just look at where the C point finally petered out. There were
other things at that spot, too. Do some work and you should find them.
And where did
it go after the C point? Right down to that trendline, where it started to
react. Notice, too, the two key time factors coming in on the 4th, just two
days after the reversal at the trendline. This is very close, and the up day
when it started to move was right on the 4th. Remember, just like with Fib
groupings and lines, I am looking for areas, not exact points,
and this is well within the time area.
So, will this head up here, or will this just
be a minor reaction at this trendline, and the ABCD completes lower? Or will
this be a 'wave 3' and it drops even lower? Think about this. If the
market is to go down here money will likely flee to 'safety', and treasuries
will go up, and hence rates down. If rates go up here, treasuries are going
down, and likely the market is going up as money flows out of treasuries into
the market. Hence, when I try to assess the market, or rates, or currencies (as
similar relationships exist), I look to see how the setups from each area
complement each other (or don't). So, rates have some interesting things coming
together, as does the market, as we will see.
Let's go way back to a chart I
showed in the April commentary. All I will do here is add on the current data.
The reader is encouraged to go back to the April commentary to
look at the chart at that time.
The S&P has just headed straight for that
area posted some five months ago. This area is based not only on a key
trendline and sliding parallel, but also a 'minimum' .382 time retracement.
There is nothing magic about any of these factors, they are just some of many
that I am watching. It does show, though, the 'magnet effect' that some of this
stuff appears to have. So, this is a 'starting point' for me to do some more
Let me add a big, key weekly set onto the chart. This is 'way
Here's a big, weekly set that was on my chart
in October of 2007! Now, a few observations come to mind. First, there was a
lot of interaction along that upper division line (the upper dotted line coming
into the key area). Price 'tested' that line three times before breaking down,
and once it did break down, it came back through that price action many times,
above and below, before it finally gave way. That gives me additional
confidence in that line. It seems not a coincidence that the line comes right
into the key area, right at the key time.
On the other hand, the next
observation that comes into mind is that overall, the other lines from this set
haven't done a great job creating price reactions. That detracts from my
overall confidence in the set. Remember nothing is 'cut and dried' in price
reading and trading, if it were, we'd all be billionaires (actually, if it were
all the money would be sucked out of the market immediately and there wouldn't
be a market anymore). At this point, let's leave this set and look at another
viewpoint. I will tie the above in with what I am about to show next, for the
chart of the month. I suggest that after you review the remaining charts you
hit the popup for the chart of the month, and then you can look at that in the
'context' of what I am showing here step by step.
Let's look at another big, key set
from the weekly timeframe, show closer up on the daily chart here.
Before that area above in the 1,100's is
reached, the S&P has reacted right off another key area right in here, at a
division line from another weekly set I have had on my charts for some time.
Notice how that last ABCD on the way up oscillated around that median line (in
red). I will get to this a bit more later on, but note that the price action
looks bullish as all get out here, ready to launch right up and over that
I'll add another line onto the chart.
The solid blue line that I added is a very
obvious trendline from the weekly chart. We will examine that shortly. Notice
how it comes right into this area, and how the S&P just hung around that
confluence for days before dropping strongly. It surely 'saw' the area. The
question is, will there be any downside follow through, or was the drop another
one-day wonder, and up it goes? It is very tough to call the end to a trend,
especially if you don't have a clear pattern. Here we have nothing but strong,
strong impulsive action.
I'll zoom out a bit, and move up to a weekly chart, so
we can see how all this looks from that perspective and 'context'.
This key weekly set clearly shows the upper
division line in this area. Notice, though, the very interesting trendline in
blue that also hits right here, time and price-wise. Yes, for those that are
astute with 'crazy' trendlines, this one is pretty obvious, but nonetheless, it
bears watching, in my opinion. Although I haven't shown it today, I have many
other things in this current area. I did do a post on that in the public KT
forum over at MyPivots, so you can check that over there for a bit more detail.
The point is, although there isn't a clear ABCD pattern structure, there is a
very noteworthy area right in here, as well as the one above it in the 1,100's
area (I actually have two very tight Fib groupings in the 1,100's to complement
the line confluence up there).
Now, what is the practical use for me in all
of what I have shown? It's simply this. My plan is to go with the trend. I am
looking for corrections in trends that I feel have more potential room to run.
But a trend is a relative thing, as all of you that struggle to learn that most
difficult of skills, 'context', can firmly attest to. The trend is manifestly
up right now. But on what timeframe? On a daily chart it is clearly bottom left
to upper right price action on the chart. On the weekly, though, it is clearly
down. This move up appears to be just another correction is a strong downtrend.
Look at the chart, the price action is upper left to bottom right all the way.
Alas, though, what does a monthly chart look like? Bottom left to upper right,
an uptrend all the way.
This is the skill part of 'context' analysis. There are
setups galore all the time, but which ones have an edge when taken in the
'context' of the odds of that given trend persisting? That's the higher-level
skill, in my opinion, determining that. So, at what points may the downtrend
start to reassert itself? I watch the areas that stand out, like the two above,
and I see how the price acts there. If I see something that would allow me to
get on the short side, say in this case with some puts, I may look to do that.
Many times I notice a reaction in the areas, but then it starts acting in such
a manner that it is clear it has no desire to follow through.
trying to call the end to the trend, but rather attempting to take advantage of
a reaction off a key area and some favorable price action that is giving me a
chance at a decent reward/risk setup. If it stops acting as I would expect
after the initial reaction, I can look to scratch the trade, and right back
onto the long side I can go if that sets up. The last thing I want to see if
I'm on the short side is the initial move down showing a corrective structure
right into a key area, and then a reaction off that. I can give it time and see
if it then rolls off the expected area, and if it doesn't call it quits at that
point, or I can look to get off the short side and back onto the long side off
the long setup. I am finding that this is what the market has been doing at
every potential shorting area since the low.
So, to sum it up, as I've said in
the forum many times, my bias is long, long, and more long, and when a very key
area is hit and I see a reaction I look at the short side, and if it behaves
poorly after the initial reaction, or sets up the long side, I get off that and
right back to the long side. In between those key areas it is just long, long,
long. That's the plan until it's time for the short side again. Maybe that's
already started now, maybe it's not for years to come. It doesn't matter. I
just look for setups with the trend. I don't care when this 'bull' market ends,
or if it ever ends. It's all about the setups. The above is my very
oversimplified overview of how I try to stay with the trend.
Let's look at
a recent setup. I only have one chart space, so I can't show a before and
after. We'll just look at the setup and what happened off of that.
The S&P came off a key area for a
potential resumption of the downtrend. This triggered a put play as it rolled
off the A point on the chart. After the expected potential 'wave 2' heat, it
started to roll nicely into what I was hoping was a 'wave 3'. Here's where
setting up areas, watching developing patterns, and assessing other possible
premises is crucial. If all I could think about was the short side play, I'd be
blind to what might be developing. Even if I didn't want to look at the long
side (in this case I was, as I described above, heavily biased to the long
side), I still want to create and monitor the long side setups and areas, if
for nothing more than management reasons.
that an ABCD pattern was
forming. There is no way to know if this was a CD leg (wave c for you
Elliotters), or a 'wave 3'. It's not necessary to know to trade. I showed a few
of the basic, critical Fibs on this chart, but I had others. I had a key set on
there, and I noticed a very obvious sliding parallel, shown in red, came right
into an important area for the ABCD. (Please note that I do most of my work on
the ES contract, and I do versions with and without overnight data, so the
above is just a small representation of my actual working charts.) I also had a
trendline, shown too in red (the more gently sloping red line), based on a
concept somewhat like the 'crazy' trendline in the weekly S&P chart. The
most interesting line was the blue one, which is an old median line from a set
that goes way back to the crash time and the March bottom.
lines came together in one spot (I had other lines in there, too, not shown for
clarity), with a time factor that some of you that study time cycles will see
right off. It all came together in this one area. Not only that, it finished
with a signature move I teach my mentor students, and after starting up,
'tested' the area with an .886 with some other factors that form a special .886
setup unto itself (at the arrow). This is all very clear on a lower timeframe
ES chart, which I suggest you study. So, if I'm holding puts at this point, do
the odds favor my being stubborn and giving them time as this begins to rise,
or do the odds favor taking whatever I might have at that point and looking at
some calls? (Understand, these very same areas give me the bias for intraday ES
plays, as well as being useful for swing trading plays from area to
If you look at what just happened after the possible 'one-day
wonder' and reversal as this commentary 'goes to press' you can see that
perhaps the same thing has happened once again as the S&P rolled off that
key line area. On the lower timeframe it has formed an incredible pattern at a
key Fib and line confluence. I have at least six lines hitting the same general
spot, and then a few additional minor lines, too. I almost chose that one as
the example here, but it would have taken too long to recreate all those lines.
So, will this one follow through and up we go to that 1,100's area? I have no
idea. Will this be a 'wave 2' bounce here, and down we go, an intermediate top
in place, perhaps even a long-term top? I don't know. I don't need to know,
though, to trade.
Look, when I'm short side and it forms a near perfect setup against
me, and my initial trade is counter-trend for the current action, I am not
going to want to sit around and 'give it time'. Giving a move time has its
place, especially if one is a trend trader. Patience is truly a virtue for a
trend trader. But I don't see the sense, either, of overstaying one's welcome
and fighting the trend when a monster setup forms in the direction of the
current trend, and it produces a strong reaction dead off of it. If the
downtrend is to resume there should be plenty of time in that direction to look
Sure, under limited circumstances I can take shots at potential
countertrend moves if I have a clear area, but I am ready to get off that and
respect price action as it unfolds. I don't ignore clues and I don't marry one
side or the other if the price action says otherwise. Make sense, I hope?
'Context' is perhaps the most difficult and most advanced skill to master.
Human nature to fight the trend is strong. Just keep studying and working on
this, as it is a critical skill to learn.
Well, I hope you found this
commentary useful and informative. I find that as soon as my students get the
basic rudimentary skills down they next start to struggle with two issues. One
is the various psychological aspects of trading (I think because those didn't
play much of a role when they were struggling so hard with basic skills at
first), and 'context' issues. I have come to expect this, and I see the
progression over and over in those that I work with.
Try not to
get too discouraged if you, too, find 'context' and staying with the trend
difficult skills to master. It takes time and practice, lots of it. No one gets
to be a doctor in a few months or a few years, or an architect. This is no
different. It's time to pay your dues. Happy charting, and I'll see you all
next time, refreshed from a week long break tilling the soil, splitting
firewood, golfing, swinging on the porch swing with my better half listening to
the loons on the lake at sunset, and just generally wringing all that stress
out of my system.
The next commentary will be next month's edition, posted by Sunday
evening, October 4, 2009.
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