Book: Kane Trading on: A Totally New 5-Point Pattern
March 27, 2005 Commentary (weekend edition)-
I am starting to sound like a broken record, but, boy, is this market trading well for my methodology. It just seems to bounce from one harmonic setup to the next. And when a setup fails, it seems to do so in a predictable manner, like by showing a reaction, which then turns into an ABCD, and then it rolls over. This way I can read the action and then play for the failure. No, I can't read every move, and every setup doesn't 'work' every time, but it's the best action I have ever seen lately, from a harmonic perspective. Again, this is just my assessment.
I want to point out one more thing that I just find fascinating before we move on to some chart action. You know how I have said that it amazes me the potential opportunities that have come my way because of this website and the books I have written? Things like offers to be on television, to do articles for big name magazines and websites, to manage money (especially with hedge funds, where I just got another serious inquiry recently), and to become an introducing broker for a very large firm, and on and on.
I find all that amazing, given that I look at myself as just a small, independent trader (by choice), who wrote some books. Yes, I do think that I'm a leader in the field, and what I have come up with is unique, and even revolutionary to some extent. But I didn't think that would be the case when I started to lay out my work. So in some ways my mindset is just that I wrote some books laying out what I try to do myself, to help other traders like myself cut down on their learning curve. It has turned out to be so much more than that, now. And the point, Jim?
I am sometimes quite amazed at who is buying my books. I originally planned to target them for other small, independent traders like myself. I said in the books that I did feel the techniques would be 'scalable' and likely would likely apply to other traders besides 'the little guy', but I mostly talked in the books to those with similar goals as myself.
Now my 'reputation' has grown, the .886 is 'world-famous', and I am selling full book sets to huge hedge funds, major players in large money center bank type institutions, and serious floor traders in major pits around the world. I have done mentorships for people you may have seen on television. They came to me to study my methodology. I find that amazing.
Hey, I could keep my 'amazement' to myself on this. Any other 'pro' in the vending world would say 'Of course I sell to the big boys, after all, I'm the best, I'm so and so.' And surely they would advise me to act like it's routine for me, too. But I never set out to discover and lay out things that would be used worldwide by big name players. It is quite amazing to me that I came up with things that are being studied and used by 'the big boys'.
The other day a customer from Singapore told me that he was in the pits over there (somewhere in southeast Asia, I assume) talking with some pit trading guys, and he said they were all watching the .886 retracement very closely. He said it was amazing how often the markets there seemed to react to the number. I almost fell off my chair. Pit traders in SE Asia are now watching the .886 in the pit, all day long, like they watch the .618 retracement?
Forgive me; I'm amazed. And maybe someday they'll be watching the number I came up with (which I think is every bit as good as the .886) in Kane Trading on: A Totally New 5-Point Pattern. I wanted to share this because many readers have told me they like to hear my stories, and enjoy that I go beyond just talking trading, and allow people to get to know me a bit. I'm willing to 'personalize' it, unlike most other 'vendors'.
I'll conclude the 'story' with a thought that hit me the other day. Long after I'm gone, a hundred, or maybe a thousand years or more from now, some trader somewhere may bang a trade off an .886 retracement like it was an everyday thing, like we use the .618 retracement all this time after Fibonacci discovered that. I'll be long gone, and the trader likely won't have any clue who quantified this number, or when. But it will be out there, being used, maybe forever. Now, that is cool
Let's look at something from this week's members' section, posted right after 'Fed day'.
"Let me first make some comments on the market action. It seems as though all the things I suspected back in December that may start to unfold are unfolding. From an Elliot standpoint it was clear the sell-off from January might have another thrust up, but the risk was getting higher for position longs, for me. After the 'wave 4' ABCD and thrust up to new highs I again started to think we might be done. I don't try to pick tops, but I sure wasn't opening new long position trades. Once it rolled over my focus shifted again to the short side.
The markets have hit area after area where a reversal back up could have happened, but didn't. We are running out of areas. The financials are getting crushed. Almost every bounce up forms an ABCD pattern and rolls over. Bonds, which have been going sideways in a range for days on end and then thrusting down, only to repeat the pattern, have done it again. Rates are rising. Chainsaw Al finally said he could see a little inflation now (with the CRB index having just hit within a few points of the all-time '82 high he now sees a little inflation?).
Does this mean we are going down from here? I have no idea. I just look at the probabilities, the actual market action, and I then decide which setups I will take. Right now I'm looking mostly for shorts, with an eye on a strong bounce that I expect to happen out of the blue. I think the 'manipulators' will only let it get so scary before they ramp it up and start the hype machine again. Right now I am watching the very key ML lower //'s from the weekly charts and other big lines. Even if this thing starts to ramp it will take a lot before I'm convinced we don't have lower to go, though.
Let's move on to some charts. I'll show two sectors first, pointing out how the price action talks to me and guides what I may do and how I interpret the setups I see. I'll start with the SOX.
Let's start out with a 60-minute chart, with just a few things I am looking at.

Chart 1
As you'll recall from yesterday, the SOX hit a key area on the daily timeframe, and reacted strongly. I expect to see some solid impulsive action from there, not corrective action. If that is a significant reversal point, it should show. Instead another ABCD formed, was 'tested' while waiting for the Fed announcement, and then it was rollover city. If this were going to be a key reversal area I would have expected the SOX to blow out that ABCD before the announcement just to set the tone. Sitting right under it was a bad sign. I was prepared, to say the least. Let's look at the BKX.

Chart 2
Same thing here. This is not bullish action; this is corrective action. When it happens right at a very important announcement, it was something to note. Look at the daily chart of the BKX, and of some financials, like C and JPM. There are always some things below to watch, but lately most everything just keeps taking them out. The financials are very important, so keep an eye on them. Let's move on to what I saw in the ES right at the announcement.

Chart 3
The ES had an ABCD forming, and it had an ABCD in the BC leg. The CD leg just ground right up to the announcement, and it hit the 1.0 price projection right on the little run-up seconds before the news hit, at a line I added on. Not only that; let me add another line in from the 60-minute chart. It is one of those lines from two swing points that I add in from time to time, and mention that it is too much of a coincidence that it hits here for me to ignore. Same here.

Chart 4
The ES dropped like a rock, and using the techniques from Trade Management I didn't get a signal to close out for the rest of the day. Being a mini trade it was a close right before trading ended for the day play. If an entry right off the area on the initial reaction wasn't taken, there were plenty of trend continuation entry signals on the tick and 1-minute charts. This one was just a 'gimme'."
And I'll finish by showing a setup in WY that I posted in the members' area, without any comments. Is this just beautiful, or what?

Chart 5
It just doesn't get any clearer for me than that. This is the type of thing that motivates me to talk about how harmonic the market has been behaving. Sure maybe this one is done (I've done some extensive follow up in the members' area on this one, since it is following a script of expected behavior to the letter, so far), but my management is fully under way already.
I had the option to move up the stop, or scale some and move the stop up, as outlined in Kane Trading on: Trade Management. Barring a market shock event in WY, the play is now in a 'no-lose' position, which is where I always try to get to. Now I see what develops, and go from there.
The next commentary will be next weekend's edition, posted by Sunday evening April 3, 2005.
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