Book: Kane Trading on: A Totally New 5-Point Pattern
January 30, 2005 Commentary (weekend edition)-
Today I'm going to show something from the ES that came together on Thursday. First, though, let me remind everyone that my new subscriber service launches on February 1. If you want to sign up using the subscription option, be sure to do that before Tuesday. It will still work regardless of when you sign up, but the subscription runs by the calendar month so it is best if you sign up by month's end. So far the interest is pretty good, and I expect it will grow as word spreads.
Let's get to the charts. A setup was coming together in the ES on the 3-minute chart. I'll start by showing the setup, along with one retracement.

Chart 1
The B point retracement at a .786 (by the arrow) tells me the setup is a potential Butterfly pattern, so normally I concentrate around the 1.272 external retracement area for my grouping. I'll add that grouping onto the chart.

Chart 2
As I was looking for 'context' on this trade I noticed an interesting upper-boundary trendline. The ES has been range trading with an upward tilt, and my longer timeframe bias was downwards. Let me show this line on a 13-minute chart.

Chart 3
Although I don't like trying to short off range tops, if my bias is downward and a pattern emerges with a reward/risk setup that I like, I'm not opposed to playing it. I'll show this line on the 3-minute chart, along with another line I saw.

Chart 4
Although the additional line I added (sloping up from the bottom left hand side of the chart) seems quite unusual, it's one I use frequently with certain pattern setups. These lines had me wondering if a lower grouping may not be the place to watch, or at the least to have it on the chart to see how the ES reacted to it. I'll show what I came up with.

Chart 5
This multiple groupings technique is right out of the books. This grouping is right where those trendlines are coming together. I want to watch the reaction in there. Note that although these are two distinct groupings, it's still less than a point and a half from the top to the bottom of both of them. I can't expect the ES to reverse to the tick on every grouping I build. This gives me the area that I now watch for a reaction. Let's see what happened.

Chart 6
The ES overshot the lower grouping by just over a tick and put in the high bar right at the intersection of the two trendlines. The ES tested the area multiple times, but never threatened any kind of price stop I would have chosen. Some may have chosen a time stop and not held this.
After a sharp rally from the low shown on this chart the ES dropped down another 4 points. Note the pullback retest entry at the lower boundary of the grouping, too. As a last note, take a look at the pattern that formed after this current pattern fully played out. Talk about one pattern after the other.
That late day ramp came right off another clear pattern which was never violated at all, but probably shook everyone out on a time stop as it went sideways for hours on end. That ramp came right off the pattern without ever threatening a stop set below the grouping. I'll leave it as an exercise for the reader to put that latter setup together and study it.
The next commentary will be next weekend's edition, posted February 6. I hope to see many of you in the members section on Tuesday.
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