Jim's Chart
of the Month



Book: Kane Trading on: A Totally New 5-Point Pattern
August 3, 2008 Commentary (weekend edition)-
I'm going to start out today with a few items of business, and then we'll get to work. One of the anomalies of having moved to the rain forest of the pacific northwest is that the time of year I want to spend my free time (what free time?) out with family, I usually spend doing the mentoring and such obligations. What I didn't know, or count on when we moved here, was that the winter storm season can be quite brutal, with hurricane force winds, lots of rain (well, that we counted on), and many, many power outages.
We have been hit by three 100-year storms in about a 12-month period (Nah, there is no global warming...). The last one had winds in excess of 120 M.P.H., if the local records are correct. We had one stretch of a few miles of road with several thousand trees down across the road (you read that right), and some of the old growth trees are as big across as a car. Now, why tell this now, in here? Well, I expected to do most of my one-on-one mentoring at odd times throughout the year, so I could have free time during the prime summer season. Well, as it turns out the late fall, winter, and early spring aren't too good of a time to have people up here, not only for the lack of vacation possibilities for the people coming in, but also because I wouldn't want anyone to spend their time in the dark listening to wind and wondering what it would be like to actually do some work with Jim.
So, again, why tell this here and now? Well, other than scale back even more on mentoring (something I'm giving long and hard consideration to), I've been forced to do it during prime season. With that season winding down, people want to get here and get that done. I can't really work much past about the end of September. That means I have some obligations coming up. And wouldn't you know it, one of them falls right on the weekend of this commentary. Now, most people in my shoes would just cancel the commentary. You know me, I'll get it done, somehow someway, if it is at all possible for me to, because that's just how I am. So, I will post this commentary early, probably by Wednesday, July 30th.
On top of that, most of this is being written on Sunday, July 27th. Everything but the last chart, unless something incredible happens in the early part of this week (which, almost undoubtedly, will). I had already decided I wanted to follow up on some of the work from the last commentary, and a lot of that I had the data for already, so this should work out fine anyway. One other aspect of this is that I am going to be extremely busy this weekend, probably Friday-Tuesday, and since I usually try to do too much (read that: everything), I am going to put e-mails and book orders on the back burner until after. (I generally follow the market for the first half to two-thirds when I do a mentorship and it requires extra non-weekend days, like an overseas one, and then start the mentoring work, so I don't miss very much of my own market time.) If you want to order or ask me any questions, please wait until after Tuesday, August 5th. If you want to order or send me any e-mails before, that is fine, just please be patient because I can't do it all, and I'll get to it as soon as the smoke clears.
Lastly, I am very pleased with the feedback I am getting, As I said, it's this type of feedback that I get that keeps me doing these commentary. I wanted to quote one I just got a short while ago: "Can't wait for your next commentary. I think I checked your site like 15 times for the last one to be posted. Like always, your work is amazing. Thanks, Jim." As long as notes like that keep coming in, I'm inclined to keep pushing myself and doing the work for everyone. I'm glad I have a core group who really appreciate my material.
So, without further ado, let's do some work. The market has been moving incredibly well, and once again, the big move was right off the area I posted in advance in here. No, I don't say that to be cocky or arrogant, only to say I am showing things to watch in here before the fact, and some are playing out quite nicely, as we will see. When you have a website and books and such, and you post to forums here and there, you can get very, very sensitized to the endless slew of people who constantly ask for 'in advance' charts. I'm starting to think, though, most of them don't do it for they reason they say, to make sure the person can show salient information before it has unfolded, but to 'play' the person for setups so they don't have to do their own work. Hey, it's just a theory...
Instead of starting with the chart of the month, I'm going to start with the last chart from last month's commentary, in the INDU. Recall I said the INDU seemed to be leading. I refer the reader to the last commentary to get refreshed on all the complex scenarios and thoughts I had posted on the INDU and the S&P.

Chart 1
Here is that last chart, as posted last month. One scenario was a move down to that arrow just below. Recall that the upsloping line there is the key (super-key) weekly line I've been waiting a long time on, that goes back to the '02 and '03 bear market bottom action. The INDU looked headed right for this spot, and it would be a nice potential bounce spot. Although I threw in a simple .486 retracement, and the downsloping set to fill out the framework a bit, the the weekly line was the centerpiece of the area. I also had another nice downsloping set I discussed a bit in the free forum.
Let's move ahead and see what happened.

Chart 2
The INDU went right to that key line and bounced up nicely. Although in this weekly 'context' the bounce doesn't seem that large, at this point on the chart it was just over 870 points low to high if my data is correct. Notice what happened, too. It went right to that downsloping median line area, and started to come in a bit. I wonder if there was anything else in there besides that very key median line to have me looking at that area? Well, we'll get to that, as soon as I mention one more thing here.
If one is real nit-picky (keep in mind, I always say watch areas, not exact spots), one might be asking 'Hey, Jim, didn't that price action fall a bit short of that downsloping set, though?' Mostly, I would say yes, but don't try to get too precise, think of the broader area and the most key line, and that was surely hit cleanly. On the other hand, there was something else going on with that set that I was watching here.
I'll add something onto the chart.

Chart 3
I added a set of offset lines onto the chart, based on that one push through that upper parallel there. That had me looking at the same amount both above (shown by the lower offset line), and below the lower parallel (not shown). The offset below the lower parallel would have pushed it quite a bit below that key uptrending lower parallel, so that area wasn't of that much interest to me. The offset line shown really nailed it, and pulled the entire area together nicely.
The use of offsets isn't my creation, although I think I do some things with them that are a bit unique. I cover these in the median line book, and in the one-on-one work. You can think of it this way with a 'displacement' offset, as I call this. If you cloned the set (something that is easy to do on most software) and moved it, you would see the move down is almost dead exactly the width of the set from parallel to parallel. That's what the offsets adjust for, or show. And that's the balance that this set gave me into the area. Now it seems pretty amazing, huh? It is to me. Not my work, I mean, what the market does.
Let's drop down to a daily chart and see what the rollover area looked like.

Chart 4
I added on a set I was looking at, and some numbers. This is not by any means all I had here, I just wanted to throw in some key factors and some assorted odds and ends that I had in here that really had me watching to see what would happen here. I have some key retracements in there, a .382 and a .447. I also have the monthly pivot in red (yes, I look at where the pivots are because some big players do), and two other lines. One is the January low, possibly being 'tested' from below, and the other line, as curious as this seems, is the 2000 bull market top. Very interesting, huh? Yes, it is.
Let's see what happened off that.

Chart 5
The market dropped right off that area, with analogous setups across the board in just about all the indices. The INDU dropped over 370 points by my data, high to low. So, what is my thinking here? Well, my premise is that we are in a primary bear market that probably has a lot more to go. It is also in need of a bounce.
It hits a key weekly area and starts to bounce. The first area it hits, which is a much smaller timeframe area, started it pulling in (or rolling over, possibly). I can now set up some areas in this pullback to look for clues. If this bounce is a bear market rally off a key weekly line, it should come back in a bit, preferably to an area I can find, and then start another strong leg up, headed for higher areas on that weekly chart. If it can't hold the pullback areas coming up, that's a big clue for me. So, the key is setting up the next areas and watching the behavior, the price action. That will help me make decisions on what I might want to do.
Let's drop down to a 130-minute chart, and I'll add a few things onto the chart.

Chart 6
I added on a nice-looking set, and .382 and .447 retracements. The red line is the weekly pivot, sitting right below. Keep in mind, I am writing this right now on Sunday, July 27th, and that is the weekly pivot from last week, sitting right under this area, as well as that division line right there. I also threw in a .382 time retracement just for grins, which hits right here.
Although this could drop further, and then rebound up sharply, and I do have other areas to watch below this one (not shown), I would like to see this come off here strongly. After an over 870 point ramp, if this were a strong bear market rally, this should get going soon. The initial price action here is not strong at all, and if anything, looks weak. This area will provide some great clues for me. As we stand right now, I have no idea what this will do from here. As I write this it's before the futures even open today. When you read this, hopefully Wednesday, more will have developed, and you'll just have to imagine me sitting here with only the above information at hand. This is what it looks like 'in real time', to me, right now.
What I will do right now is finish working on this commentary for today, and then do one more chart showing what it did from here, probably on Wednesday after the close, when I hope to post everything, including the next chart of the month. If nothing worthwhile happens here I will try to chose another chart for the final chart. Given my schedule, this is the best approach I could come up with, and hopefully it will prove to be interesting.
Okay, some time has passed, so let's look at that INDU chart, as it sits after the close on Wednesday July 30th. I'll add a few things onto the chart, and take some off that are no longer relevant.

Chart 7
So, the INDU didn't care one bit for that area, and just kept going down right through it. As I am wont to say quite frequently 'No trigger, no trade'. This is the part about the methodology that many struggle to grasp. It's not any reflection, in my opinion, on the methodology if this area is ignored. I am looking at various spots to potentially position myself, and part of the integrated whole of the methodology is seeing a reaction at the area and then giving me a trigger, a specific price action clue, that tells me it is acting as I would want it to act if the setup is going to play out.
Does that guarantee it will play out as I want after that point? Of course not. I'm just trying to collect small edges across the entire 'Trading Plan', and without a reaction like I want, I just stand aside. Many, many areas I watch are never hit, many are blown right through, some react just right and then roll right over and blow the area out, some go a little ways and then just chop, some smoke off into the blue sky, and so on. Everything that can happen will likely happen if you watch enough areas for long enough. The thing is to have a plan, and then when things come together, one can act on that plan, and have things laid out as to how to manage it from there, step by step, for all contingencies. As I've said endless times, the potential trade area (the PTA), i.e. 'the setup', is only 10%-20% of my entire comprehensive 'Trading Plan'.
Now, with all that rambling done, let's move on. I set up the next area below that I am interested in (in reality I already have it on my working charts, but for the sake of clarity I usually only show one area at a time). Notice the slight 'congestion' at the first area, at that .382 time retracement. The next spot hit at that larger median line set lower parallel, at the .618 time retracement (time retracements and projections are not a big part of my work because I am using other techniques, as explained in the median line book, but I do use them a bit, and this is just some added fun for us here to look at this), and set up what might be a nice unfolding ABCD pattern.
This triggered nicely, and so far has run quite a bit. Notice the small reaction around the median line, just like on the way down. To me, this set is more in tune with the action than the smaller set. The reader is encouraged to recreate this work, though, and notice some additional things. Add on some lower outer division lines on that smaller set, and see how those hit, as well as the division line for that bigger downsloping set. You can see how close this area is to the middle area between the red median line and that blue lower parallel. So, there was more than one line there. Keep in mind, as I frequently say, this is just a line framework here, no Fibs, no other work.
Notice how this is approaching that downsloping median line again here, and how the ABCD would hit near the upper parallel of that other set. I only put the 1.000 price projection on there for the ABCD to guide the eye to the general area. Of course my full working charts would have all the layered groupings as well as other lines, and so on. This dovetails into the chart of the month, in the INDU. I wanted to break with what I have done for the last three months, where I showed a fairly specific spot in advance, and that spot was where the market reversed, within acceptable tolerances to me. I wanted to show a much less specific chart with lots of possibilities on there. This chart shows 'how I think', if you will, as I play 'the scenario game'.
I look at where I think the key spots may be, and then I see if anything unfolds towards them. It is a dynamic process, and changes as more data comes in. When something starts to shape up I start to add more work onto my working charts, from the timeframe I am looking at on down. I tend to work 'top down'. So, for example, notice that if that ABCD did come together, it puts the INDU in that one area with the two lines at about 12K. That's one of the two key overhead areas I am watching. So, that's one potential unfolding scenario I may be looking at.
If that gets 'blown out' (assuming the INDU even goes up there), I can do some 'wave 3' type projections and lo and behold, I start seeing things at that next line area highlighted with another arrow, at around 12-5. And so on. And if it drops down, I start to look at those possible scenarios. I have gotten a lot of compliments on my scenario work, so I know some people really like that approach. So, look over that chart, see what you can come up with, and let's see what happens and if anything worth writing about unfolds off that for the next commentary.
Okay, as I said last month as I closed, that's all for me. We are at a tremendous juncture here I feel, with lots of action ready to unfold. The talking heads all say oil is done, the dollar is strengthening, the bear is over, financials are a buy and the credit crisis is over, housing is starting to turn around, and all is well once again. Heck, we even had some job data today (keep in mind, it is now Wednesday, July 30th as I conclude this commentary here) showing job growth. There is only one problem here for me in 'all is well' land, and that is that queasy feeling in the pit of my stomach I just can't shake. You know, the one that you get right before something really bad is about to happen...
The next commentary will be next month's edition, posted by Sunday evening, September 7, 2008.
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