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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'.


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.


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.


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.


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.


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.


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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