Jim's Chart
of the Month



Book: Kane Trading on: A Totally New 5-Point Pattern
December 6, 2009 Commentary (monthly edition)-
And here we are, at the last commentary for 2009. Hard to believe it's that time already. The next time we meet it will be 2010. And speaking about 2010, I have a suspicion that it is going to be a year that goes down in the history books. I am staying in the camp that we are in about the third inning in this whole mess, the 'Wave 2' calm before the 'Wave 3' big storm that I think may start in 2010. Time will tell, but if you follow Zero Hedge at all, you'll know why I think this. I can only muse at how incredibly bad they messed the entire system up, and how almost completely hopeless it seems to put Humpty Dumpty back together again. But, alas, I don't want to start this commentary off on such a negative note heading into the happy holiday season, as we are, so I'll leave it at that. I just want it clear that I'm not buying any of that idiot box propaganda about good times just ahead.
I'll cover a few items of business, and then we'll get right to the charts (yes, we have charts). First off, let me mention that I was surprised, maybe even shocked, at how many positive comments I got on that last chartless commentary. I was thanked for my honest approach. I shortly after saw some forum posts and such referring people to that commentary. I guess it really struck a chord. So, in the end it worked out okay, and I'm glad I had a chart transition period so I had an excuse to write that up. Some day there may be a 'Part II'. I also archived it on the Free Articles page so it will be easy to find.
Next, I wanted to bring up that I am mulling over the idea of doing some small group mentoring. I probably won't be able to work out the details to my satisfaction, but a few things are motivating me to at least look at this. One is, I am so booked right now for mentoring it's crazy. I have one more person coming on next month, and after that, it's a waiting list. I can only handle a small handful of people at a time, which is how I want it, but the demand is far, far outstripping my ability to work with people.
I was thinking I could address this with some small group programs instead. I got the idea from people inquiring and suggesting this as an option I might look in to. I greatly prefer doing one-on-one, but as the pressure mounts to do more and more work remotely, and I have to turn people away, acquiescing to the times and 'modernizing' at least a little bit is something I am looking at. If I make any changes I'll let everyone know.
Lastly, I have charts for today. I will be adding two other charting platforms into the mix. This will allow me, as hoped, to not only get the commodities back into the mix, but also tick and other non-time-based charts. We won't be looking at any of the latter today, but perhaps next month. Now that I have a lot more variability and options, hopefully I can choose some very interesting examples going forward.
Before we start, I want to cover a bit about the charts, as it may take a little adjusting to at first. Most of my charts and such have been in .gif format, and a few have been .png, and maybe a scattered .jpg. For the charts today the default from the program was .png. It also allowed for .jpg. I did a quick comparison, and thought the quality was about the same, so I opted for .jpg, since I thought .png was still a bit 'new' and maybe some people would have setups that didn't handle .png. By the sixth chart I started to notice the colors I was referring to were really not that clear, so I tried the .png again, and it was a lot better, in my opinion. So, for charts seven and eight I went with .png format (which is a smaller file size, too), and going forward from this point with charts from that program I will use .png. I guess .png concerns are years past any worry.
So, if anyone has any issues with any of the images, or with any of the pages loading correctly, let me know. I also upped the chart size for better visibility, but given that I am using stone age tools and layouts and such for much of this, I am not sure if the changes I've made could have 'unintended consequences'. If I don't hear anything from anyone, I'll assume there aren't any problems. I hope everyone likes what I can show now. It may take me awhile to adjust, but it should be good. This way, I have choices as to what platform to use to best show a given idea that I have.
Let's move on to today's work. We are going to look at a nice example in the Aussie dollar. I brought this one up in the forum, since we have a few currency traders in there, and I thought everyone would like to dig in to this one. It's great to be showing something other than the stock indices for a change. In the coming months I plan to choose some ES intraday examples, gold, crude, other currencies, treasuries, the whole shooting match. I hope it will be a lot of fun for all of us.
I'll start with a 240-minute all-sessions chart of the Aussie dollar, continuous contract. For those not familiar with the QCharts platform, this is a time based chart, and the all-sessions gives 24-hour data. Currencies frequently have significant moves overnight, so that is data I need to look at, but if it is illiquid for certain times, a time chart can 'skew' the 'look' and the timing factors. This is where higher tick charts, volume charts, and the like can be of use. For now, though, I am finding the higher time intraday all-sessions very workable.

Chart 1
Source: QCharts.com
I saw the Aussie begin to pull back, and I started to look for potential 'support' areas that jumped out at me. It's not so much that I am thinking in terms of traditional 'support and resistance' as much as I am looking for areas that may be significant, and then if I get things happening there such as patterns, certain price action behaviors, and the like, then I may have some synergy at that spot. In this case I had a key set line coming in at an area where all the longer trend retracements came together. Mixed in there I have a .146, a .186, a .236, and a .382, all grouping pretty tightly, given how far back they go.
Let me note that because I can't 'cut off future data' on this chart, I have to push it up to the right there, and you can't see the spot where the grouping and the line hit together, so you'll have to mentally extrapolate that. As all this started to unfold, I noticed something obvious on the chart that I hoped would lead to not only a more useful pattern for me down into the area, but some potential trading opportunities in the meantime. What did I notice?
Let me label the chart.

Chart 2
Source: QCharts.com
I saw the Aussie do five waves down at this point, so I started to expect the odds for a bounce were increasing. I am not a strict Elliott-waver, as I have said many times I take from Elliott only that which I find helps me. I watch 5-wave sequences, but I find many times an issue does something else, and I'm fine with that. Many times more than five waves are formed. This is something I cover with students in one-on-one, in great detail. Point is, if I have anything else in this area, I'm ready for the bounce to start.
Now, here's one of the cool things about these charts. I'll drop down to a 60-minute chart here, retaining all my lines. This will allow us to examine things very easily from many different perspectives. I'll also add a few items onto the chart.

Chart 3
Source: QCharts.com
The Aussie starts to move up strongly, and hits into a key line area in the .618 retracement neighborhood. I find this interesting, and potentially useful, because if you haven't read the clues yet, I am hoping the Aussie forms an ABCD down into the key area, and to do that, I need a bounce and roll over. But I also have some ideas where it might have to bounce to in order to form an ABCD that I would like, so without the higher 'context' here, you can't quite be sure what I'd like to see here. Bear with me, though.
I'll drop down further, this time to a 30-minute chart, add some more data on, squeeze the data in a bit, and add quite a few things onto the chart.

Chart 4
Source: QCharts.com
The Aussie rolls right off that last area, as if on cue. This is the spot now marked 'B'. It rolls right down to the next .618 retracement, back at that median line. I also added a thicker red uptrending line on there, so we have a line intersection right at this spot. This last line is not anchored at the point marked 'C', the price action is hitting the line at this point. After an expected move the Aussie pulls back in to a .786 retracement, and up it goes to the high area there marked 'D'. But, alas, now the Aussie has formed a bearish ABCD here. This might send it back down, perhaps to the area of interest, and if so, that may be an ABCD itself, with this ABCD in the BC leg of that bigger ABCD. If that happened right into the area I first showed, I'd be very interested in that.
Let's jump up to the 180-minute chart (I'm loving all this timeframe jumping!), and I'll show what I am talking about. I'll add some work onto the chart highlighting the current area, and delete off some of what I did before that is not relevant for this setup.

Chart 5
Source: QCharts.com
The Aussie has five waves down, and an ABCD up into another key line. I have the ABCD price projection in there, a BC external retracement, and that .786 retracement off the high there where this entire sequence started from. It sure looks strong into here, with those high of the bar closes. I guess it will blow out the area, and I won't get a chance down lower, and I won't even have a chance with a potential short trade here, will I?
I'm not joking like this here because this is a well-chosen example and I know the results, I'm joking because it's a legitimate thought. And just like how television shows nowadays kill off major players when you least expect it (in the old days you always knew the hero would make it), I will be showing examples here and there where the areas are not respected at all, as many areas aren't, not only because it's good to see those, but also to keep everyone on their toes. That's where entry triggers and price action reading come in, and why they are so critical to me. So, let's see what happens.
I'll move ahead in time a bit, and add some data onto the chart.

Chart 6
Source: QCharts.com
The Aussie saw the area all right. This is why I like ABCD's, Fibs, line areas, and the concept of synergy so much. Heck, maybe it's all random, I sure can't prove that it's not. All I can say is I've seen enough charts to have made my own decisions and come to my own beliefs, and it sure doesn't seem random to me. So, if you look below you can see this coming down to that main area we started with. If so, it would be a nice ABCD indeed. Also notice that median line sloping down, in red (I know, the red is hard to see, but that will get better shortly as I 'fix' the charts).
Let's move ahead a bit more. I'll relabel the two ABCD's, and add a trendline onto the chart. Notice the difference in colors as I switch to .png format.

Chart 7
Source: QCharts.com
The Aussie just dumps right into the area. Notice the small bounce/checkback off the area of that median line. The thicker red trendline acts as a 'timing factor' with the key blue upsloping median line lower parallel, right into the Fib area. Now the move through that smaller downsloping median line makes more sense to me. After the next chart I will show another factor regarding that line. So, a bigger ABCD completes right into the area, as I had hoped from the start, with an ABCD in its BC leg, something I just love to see. And if it hadn't formed an ABCD? In most cases I just move on, looking for ABCD's. No big deal.
I'll add some more data onto the chart, and squeeze it in a bit, so we can see what happened off the area.

Chart 8
Source: QCharts.com
The Aussie took off like a shot off the area, and went right to the line intersection area above (notice how it exceeded the blue upper parallel by about as much as it exceeded the red median line). Even the pause was in an area I expected a pause might occur. This was the high area for the Aussie, as it started to check back and drop as the USD ramp of Friday got going. Notice how it 'tested' that previous grouping, even doing one last little push up, before it gave up. Take a look at what it has done since, and do some analysis to see what potential setups may be forming at this point.
And for those that are saying 'Well, Jim, it missed that Fib area, it never got down to it', here's what I think. I am looking for areas, not exact points. Look at the lines, look at the Fibs. Also note that I showed none of the other Fib work, of which there is a lot here, or it would just be too cluttered. Many things hit a bit higher. Even if they didn't, though, it's of no consequence to me.
Here's what I tell my students. Even if you hate hunting, try to follow the analogy. Say we are looking out at a huge field, as far as the eye can see in all directions. A guy says to me he can tell me where a rabbit is within an area of say ten square yards. He asks if that would be useful to me. Do I say no, you'd need to tell me the exact spot or I can't use that info? Or do I say that's great, and go to the spot, and once there see what that rabbit does, and react accordingly? It would be the latter.
If I can pinpoint an area that is fairly close to where something may happen, that's great by me, and then I'll see how it acts, read the price action, and act accordingly. I'm always thinking areas, not points. And if you jump back and look at the run up on say a daily or weekly chart, you can see just how close and tight this grouping was in 'context'. So, when a guy (Mr. Market) tells me about an area, I listen.
Now, I have to say that at best we covered 5%-10% of what I saw in this one, at the most. There are many more lines, many more Fib techniques, entry and price action aspects, management things, 'context' things, some proprietary things, just a slew of things that I simply can't cover in a commentary like this. But still, I think I showed quite a lot. It's an interesting approach that I take, and I have a process from start to finish, in detail, that I follow.
Each layout is unique and has its own 'personality', but the basic process is the same, and it's quite repetitive, believe it or not. It's just a matter of watching for certain things, doing a bunch of work, and seeing if the area is respected or not, and following all the steps as they unfold, much as an airline pilot follows a process, a procedure, as he prepares to taxi down the runway.
Well, I hope everyone enjoyed this commentary and the new charts. Going forward I will continue trying to choose themes and various aspects that I feel have particular educational value. One of the main purposes of this ongoing commentary is to allow people to look at my approach to assist in making a decision on a book set purchase. It also gives me a chance to just write and present some ideas and thoughts, and get some connection with other trades.
Finally, I hope that whether or not my readers ever buy anything from me or not, they learn something and take away something of value and use from what I present, and they then 'pass it forward'. Happy Holidays everyone, thanks for participating in the KT community, and don't forget to spend time with your families, as our worlds shouldn't revolve solely around trading, as much as we all tend to get sucked into that game.
The next commentary will be next month's edition, posted by Sunday evening, January 3, 2010.
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