Book: Kane Trading on: A Totally New 5-Point Pattern
January 9, 2005 Commentary (weekend edition)-
Well, a full week without a commentary sure is a long time for me to get used to. I see so many things I'd like to share I'd almost like to have a 'live' room to post to that all my readers could check whenever they wanted. I've even thought about a subscriber service where instead of having some set number of columns or postings it would be just whatever and whenever I saw something of interest.
I'm not sure how well that would work, since many people like structure and would want to know when they would see the next posting. On the other hand, that's not always the timeliest approach in terms of interesting things that I see which would potentially have great educational value if followed more in 'real-time'.
All this is 'academic' at this point, since I am very leery of the time commitment involved with such a service, and I don't want to add anything to my plate that would substantially increase my workload. It did pop into my head, though, that I might look at a service that has posts of interesting things I see, posted soon after I see them, as well as the more typical commentary. I was also ruminating over the two styles as separate services, plus a combination package.
I'll ponder it some more, but as I have said, I'm not really looking to add any more work to my plate. I just keep thinking that I spot these very interesting things, I mark up some charts and make some notes, and then I 'file' it. I've deluded myself to thinking that I could almost post it just as easily, and have that available for subscribers. But I'd likely then have to explain it all, and then the time involved balloons out of control…
Let's move on to the market. The week started out with the type of action I had been thinking might be coming. The commercials have added more shorts, and I expect the market is vulnerable to some serious downside. As I have said many times, this commercial action, combined with the near decade low in the VIX and rampant bullish sentiment higher than at the 2000 bubble top, is not a timing indicator. For me, it's a risk assessment tool.
I tend to use tools of this sort to play a downtrend that starts more like I think it's a larger scale downtrend than a countertrend move. I don't even look at the short side until I see actual downside movement. If it starts up, I respect that and stop looking at the downside. I just don't keep emphasizing the long side with all these factors in place and the actual price action moving down. I'm trying to say (like it isn't crystal clear already) that I always follow the price action, but take into account that this thing has the potential to be a ticking time bomb.
I do find it curious that it was 'held up' until the year-end, and then left to freefall as soon as the bonuses were locked in. Now, is this the move starting here that one might expect based on the commercials and all that information? I have no idea. In fact, there may be no 'move'. It may reverse starting Monday and go to new all-time highs. I just look at probabilities, and focus on immediate price action and setups. I'm seeing an immense amount of risk in here for overly long exposure on the higher timeframes, based on my 'Trading Plan'.
On the open Wednesday I spotted a classic setup forming in the Russell mini that I wanted to show. Although I can only touch on the various aspects that I was looking at, I will frame out the setup pretty well here. The 'context' was very interesting, and I suggest the readers do a detailed study of the market not only around this setup, but also for the whole week. It was an utterly amazing trading week.
I'll start with a 13-minute chart to show some of the 'context'.

Chart 1
The Russell had already established a solid downtrend by this time. My strategy, as outlined in the books, and especially in Kane Trading on: Advanced Fibonacci Trading Concepts, was to look for a pattern/setup to get me on board the trend. I didn't want to try to call the end to a trend this strong, unless it was in the 'context' of a larger timeframe pattern/setup (and in which case it would be set up to continue a higher timeframe trend). The main issue I had was in thinking the trend was perhaps somewhat extended at this point.
Let's drop down to a 3-minute chart, and see what the price action was looking like.

Chart 2
Now, that's what I'm looking for, right? Nice ABCD pattern forms, set up to continue the downtrend. Let's see on the 1-minute chart what happened at the pattern completion area.

Chart 3
I added the grouping I was watching onto this last chart. The MR came right off the area with some nice entry triggers. For many traders this move here was enough for it to be a successful trade. I didn't like the setup all that much. I still found it 'worth a shot', but I was thinking something else may be unfolding. The 'context' was pointing out something to me.
I felt the trend had been moving for a while, and the correction here came after a steep sell-off. I felt a larger correction was most likely in order. Not that I could 'predict' that it would correct more, but more that I didn't feel the reward/risk was as favorable in this current area. That usually has me dropping down to a lower timeframe and playing for just what I expect a 'bounce' would be, if I liked that setup.
To play on this 3-minute timeframe, I needed a larger correction. Let's see what set up next.

Chart 4
Talk about classic, this is it. (The arrow points to the leg that formed the original pattern we just looked at.) A lot of numbers came together in one tight spot here. There were some incredible time factors for the pattern (not shown, but I suggest the reader figure them out and look that over) coming together right at this point. Now this is what I'm looking for. Notice how the correction now appears a lot more in proportion to the trend.
Let's see what the Russell did from here.

Chart 5
That was a major reversal point, highlighting with surgical precision the spot where the trend reasserted itself. I put a 10-period exponential moving average of the highs on the chart just to guide the readers eye to the ensuing trend. Although I don't manage on the traded timeframe too often, this gives an idea of why my management techniques, as outlined in Kane Trading on: Trade Management and Kane Trading on: Trailing Stops, didn't give me my final signal out until after this point. Those readers with the books should understand exactly what I am talking about here.
This is an example of what I strive for in my 'Trading Plan'. Yes, it is a very 'well-chosen' example, but it was only one of many similar setups that came together this week. There was a plethora of these types of plays all week long. If you have Kane Trading on: A Totally New 5-Point Pattern check out the great pattern that came together the second half of Wednesday in the ES, say on the 3 or 5-minute chart. Closed in 'plunging mode' within less than a tick of the pattern completion point.
Do you think that gap up the next morning was a coincidence? My own personal belief was that it was not (just an opinion). Look at the aftermarket data. It just started up off the pattern, and trended up until the next afternoon, moving eleven points. Very interesting, huh?
I'll finish with what I call a little 'Fib fun'. I put some more data and a couple of retracements on the last chart. Let's see what that shows.

Chart 6
The run ended within a tick of a 2.236 external retracement of the pattern. It then ran and reversed to the tick at a .786 retracement off the pattern reversal area. Now as I have discussed many times, I don't trade off of single numbers, and I surely don't use my methodology to try to call the ends to established trends.
That's why I call this 'Fib fun'. I just want to show how these numbers seem to pop up a lot more than I would expect from random occurrences. If you want, build some groupings and see if there is other confirmation for these numbers around these areas. You may find some interesting things to look at.
One last thing I want to mention before I quit. Both the ATG and CME plays signaled final closures for me on Monday's trading. The QLGC play, if played as a reentry off that last ABCD pattern (I was 'vacationing' at the time of that potential trade setup), would have signaled a final closure for me mid-week. That wraps up the plays we have been following in here. I will try to find some more to show in here for next week. A lot of things are possibly starting to set up or have already triggered in this last week.
The next commentary will be next weekend's edition, posted by Sunday, January 16.
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