Book: Kane Trading on: A Totally New 5-Point Pattern
February 6, 2005 Commentary (weekend edition)-
Well, that was some kind of a week for trading, now wasn't it? If we could only get that type of movement and action every week, I would be one happy guy. I am finding (and have been finding) a lot of what I think are great setups, and we just had a major confluence of setups at the time and place where the 'bounce' started. That was not just a random area, in my opinion.
I'm starting to think that we may be in a wave 5 here on the daily chart for this move off the August low, and this may all be a larger wave 5 up from August on the weekly chart. As I said in this week's popup quote of the week: "I don't try to predict the market, I just look for setups." I point out the Elliot as something I watch, but I'm on the hunt for setups, and that's what I trade.
Let's look at the SPX chart I laid out two weeks ago.

Chart 1
I thought the SPX might form a larger ABCD pattern down to one of the lower areas I showed on this chart. At that time I didn't see the possible Elliot count as clearly as I do now, or I might have felt the median line parallel and upper grouping would likely produce a larger reaction. I expected a bounce and then likely a rollover to the lower areas. What bothered me was just how many long setups were forming all over the place. I planned to go with the upward flow until such time as it stopped, and it just didn't stop (which is fine with me).
I trade what I see happening, not what I think might or could happen. I look for areas where I expect things to happen, and I see how the price action behaves. If the price never gets to an area, that's fine. I'm not thinking it will get there, I'm thinking I want to watch if it gets there. You can see from the chart just how key that area I highlighted was.
Let's look at that 15-minute DIA chart from two weeks ago, too.

Chart 2
I noted that the DIA was approaching that lower trendline. It tracked that for a while, and then reacted strongly right up to the upper trendline. It's amazing how lines like this can point out general areas of interest. Combine that with structure and groupings and it really shows me where to look. Let's see what happened next.

Chart 3
Now, is that line important for me to see? Without the line it just looks like ranging behavior with a downward slope. Put the line on, which comes from data from way back before this chart was captured, and there is some sense to it. I feel a lot of things make sense if you put the right things on the chart to give you the perspective.
Let's move on to something I pointed out in the members' section. That has been going great so far in my opinion. I have shown a lot of things in advance or as they were developing, and many have played out as I was thinking they might. My 'action areas' produced responses. Here's a 60-minute chart of the SPY.

Chart 4
I pointed out the area of a bearish ABCD pattern that hit right at a downtrend line and a median line parallel, as it was happening. I showed three alternate groupings, using the techniques laid out in Kane Trading: Trading ABCD Patterns. I suspected this area may not hold, and I discussed this in my commentary. The SPY went right to the area and bounced in between the boundaries of the groupings.
This is not the type of reaction I would expect. My plan was to wait for an entry to fade the setup (my use of 'fade' here means to do the opposite) if an immediate and strong reaction down didn't ensue. Go to a lower timeframe chart and look at the price action. I couldn't ask for more. The move out of the area was fantastic, and the setup pointed me right to the spot I wanted to watch.
As I have said many times, to the dismay of the conventional pattern traders: "I don't trade patterns, I trade 'action spots'." This was a clear action spot. That's why I would never just fade into a trade like this (that is, take an entry without a clear, confirming entry signal). I'm not even sure which way I am going to trade it yet. I look at the 'context', and I watch the price action in the area. That guides me on what to do. All I know is it is an area where I feel something is likely to happen. I can use my techniques to guide me on my trade premise, based on what I see unfolding.
This is the type of thing I show and discuss, many times in advance, with the subscribers. I'm able to post at any time day or night, whenever I want, if I see something I want to point out. I discuss my thoughts and observations, in the form of my now familiar 'trader talk', with copious charts.
When I post something I send out an e-mail to the subscribers so they know something has just been posted, and they can go and check the update. I think it's a very interesting and useful forum, if you like my style of teaching. I don't want to turn this free commentary into a promotion page, but I want to make something clear.
If you want much more detailed content, in a more timely manner, with a lot more material posted in advance so it can be followed and studied as it unfolds, with me commenting along the way, you really should check into getting a subscription. It's one thing to read and study the books and quite another to 'watch' me explain the techniques as I apply them in a much more timely fashion. It's the next best thing to doing the mentorship, or as my past students are showing me, a good ongoing learning venue.
One last item before I quit. Scott Carney over at Harmonic Trader will be doing a chat session this upcoming Thursday for eSignal. He has a link on his page for that, so if you are interested you can follow up from there and check it out. You know I'll be there.
Oh, and speaking of eSignal, they contacted me and asked if I would do an article for them, and I said I would. It will be a few months before it gets posted on their website because of the normal lag time with the scheduling, but when it appears I'll let you know in here and in the What's New section. I'm also looking at getting some material up on a few other big websites, and I'll let you know when that happens. The best material will still be right here, though.
The next commentary will be next weekend's edition, posted by Sunday evening, February 13.
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