Jim's Chart
of the Month

Book: Kane Trading on: A Totally New 5-Point Pattern
August 1, 2010 Commentary (monthly edition)-
This month I will break with my repeating of the same intro, just to mix it up. Everyone knows the market is just insane, moving all over the place, and doing things that require a slew of very expressive adjectives to describe. Some call the market 'manic'. I can't say that I disagree, but I'd prefer to call it 'wild'. No, not crash wild like when the first leg of the meltdown was in full swing (I think the second leg is waiting for us in the not too distant future), but still wild nonetheless. But, I think wild is good because it can lead to some spectacular potential opportunities in my opinion. The toughest market to trade, I feel, is a listless market with low volatility that goes nowhere. Without getting into a discussion about how to define volatility, one look at wheat recently, or the gold charts we will look at today, and I think there is plenty of the 'movement' that I want to see. As I've said many times, if you can't find potential trades in this market, you need to examine your 'Trading Plan'.
Let me address some business before we begin by quoting from the last commentary: "I'll cover a one item of business real quick here, and then we'll get to work. I really enjoyed my new experiment, taking a week or so 'off' from everything but the market. No e-mail, no book shipments, no students, nothing but the market and 'free time' to go outside, work in the garden with the better half, shoot a round of golf, watch television, whatever I wanted. It was better than I thought it could be. My biggest concern is how addicting it is.
So, since it went so smoothly, and I simply shipped out the orders I found when I checked my e-mail again, I plan to do this as my new way to attempt to balance my life, at least during the nice weather of the summer. I will do this again maybe starting next weekend, and again some time in August, depending on when the urge strikes me. Who knows, maybe even in September, too. I'll post notes on the books and eArticles pages when I'm taking a break, and hopefully on the What's New page. So, again, if you try to e-mail me and don't get an answer, check any of those areas to see if I am taking a break."
I did try this again in July as I mentioned, and I had a blast. I will be doing it again this month, probably starting next weekend. As mentioned, watch the books and eArticle pages for information. I'd like to say I'll do this every month and I no longer need to even mention it, but as fun as it is, the weather here will soon turn to eight plus months of straight rain (we average about 160 inches per year), and I need to keep working 24/7 to keep up, hence all this fun will soon come to an end until next season. So, wish me one last hoorah here, I need it to recharge myself for the long, dreary winter ahead (it's funny to be talking winter in August, but it can seemingly start up here in less than two months from now...).
For today I am going to do something totally different. I am not going to do a long-winded tirade about the economy and the robber barons, and all the corruption and how twisted it all is. I just need a break. Hah, I hear everyone saying, I can hear you now. Sure you will, Jim, you say that, but then a thought will pop into your head, and you'll say it will be short, and then ten pages later... But, alas, I also now hear you all saying wait, I can see charts right below. Ah, he's trying to trick us, he wrote a long spiel below the charts. I hear scroll bars. See? I hear the gasps. Nothing below the charts, either. No long spiel. I know that will disappoint those of you who love my run-ons. Don't worry, I'm sure I'll be back with something to ramble about soon enough. For now, it's just charts.
In order to attempt to keep things fresh I will look at gold today (once we cover the current market position and how things did with the last charts I posted). I chose that one not only to keep things mixed up, but also because it is a very wild, choppy, and challenging chart. I want to cover some points on that. I am purposefully choosing an example that is anything but 'textbook', 'easy', 'well-chosen', and so on. I want to explore looking at an example that isn't particularly pretty, but where I still saw the necessary elements for a potential trade. That will be the theme for today, how to 'mine' for critical aspects of a trade premise when on the surface things look a little 'challenging'.
We'll start first with our review, from where we left off last time with the ES continuous contract, on the weekly chart. This basically was the chart of the month.

Chart 1
Source: QCharts.com
Here's where we left off last month. I was watching three key levels to see what the ES had in mind. I would have loved this thing to just collapse from this point, down to one of the lower levels, but I rather suspected it would 'see' this first area and react quite strongly. Now, I can't show them more 'in advance' than this, can I? Please refer back to the last commentary for a review of my comments on the daily and weekly layouts to get up to speed on my thoughts.
Let's look at the same chart, with a bit more data, current as of this writing, to see what it did.

Chart 2
Source: QCharts.com
The ES reacted pretty much dead off that first area. The low by my data was at 1002.75, on July 5, the first trading day after the previous chart was captured, and it rose to 1118.75, a move of 116 points. Notice from where it came back in a bit the last few days? A sliding parallel (the thicker red line) off that previous key swing-high. I also added on a new green hash mark, up between the two blue lines and the thicker gray line. Is that a key spot? It sure looks like on to me. If this thing keeps marching up, that's an area I'll be watching very closely. If the upward pressure keeps up, I would think this area would act like a magnet. We'll see. It does what it does, all I can do is look for setups where I think I have an edge.
Let's look at where we left off on the daily timeframe.

Chart 3
Source: QCharts.com
We discussed how this previously didn't move down directly to the green hash mark as I had hoped, but instead took an alternate course to the lower grouping. It was now right at that grouping, and near that lower blue parallel there. This, coupled with what the weekly chart showed, had me ready for a bounce to start in here. I wanted to show the daily follow up for additional detail, and for some further discussion on that upper area shown on the weekly chart.
I'll add some data onto the chart to bring us up to the time current as of this writing, and I'll also add on some additional work.

Chart 4
Source: QCharts.com
First off, notice the nice move off the area. Between the daily and weekly charts (and keeping in mind they are only frameworks, not full workups), I was able to find the area quite well, I feel. The ES did a nice, solid checkback on the way up, and notice how it came right back to a division line (in the dotted gray) of an obvious natural median line set. I highlighted the upper parallel of that same set in thicker blue, and added on the .786 and .886 retracements. Notice how they come together quite nicely with those three previous upsloping lines from way back, and that downsloping parallel. And where does all this happen? In the same area I highlighted on the weekly chart. Talk about a magnet. I'm not saying I think this area will be reached, and if it is, that it will reverse. It may exceed it, or never reach it. The market may roll down right from here. I'm only showing areas where I will be watching for reactions, and attempting to create trade premises.
The one thing that I find so fascinating about this is the time period from the above charts. When do these areas come together? August. Yes, the same August essentially every last forum, blog, analyst, and trader I follow is talking about. I've discussed this in here before, and mentioned that with everyone, and I mean everyone I know talking about the upcoming August top, all I know is I'd expect the top to be in any time but August. It's just too talked about. Hey, maybe this time it's different, and the masses will all be right. But I'm thinking it either has already topped and will roll over shortly, or more likely, with QE 2.0 coming to a theater near you any day now, up and up and up to August, and past August and through the horrible September and October period as people try to endlessly short the seasonal factor and get killed. Anything but up until August, right to a key area, and then roll over like clockwork. But, we'll see, that's what makes the market exciting.
I also wanted to mention something here before we quit on this topic. I could have shown this on the chart, but I didn't want to clutter the chart up too much and distract from the reversal move and the upper area I am watching. I also wanted to leave some work for the readers to do. Draw yourself some offset lines on this one. Start with how much the lower parallel was missed by. Now use that offset amount, and place it above that median line (in red). Just about a dead hit. Now place that same offset line above the lower division line (in dotted gray). Interesting, the same almost dead hit. It seems the first move up was the width from the parallel to the median line, and the checkback was the width from the median line to a division line. Very curious. Must be a coincidence, right???
Before I move on the my sequence on gold, let me briefly talk about my chart of the month in WFC. I wanted to switch gears on the chart of the month, and pick something besides the ES. I've noticed that many, many issues have set up bearish ABCD's on the daily charts. This, contrary to popular belief, in and of itself does not imply to me the market will turn down at these areas. It is, though, noteworthy that so many issues are setting up at the same time. If that was a top back in April then these might be ideal short setups. But, if it was not a top, and the 'correction' is now done, these will likely act more like 'Wave 3's' than CD legs (c legs for you strict Elliott labelers), and accelerate upwards, blowing out those ABCD's across the board.
Now, without getting too far off topic, let me say that every 'wave 3' that you have ever seen is a blown out ABCD. That doesn't make ABCD's less effective for me, because I only trade them with proper 'context', and with multiple potential synergies (draw in standard support and resistance lines on any chart and tell me how many times they are ignored, but yet they still have use, in the proper 'context'). It's the 'context' that tells me which direction I want to trade. The ABCD is just the pattern, the setup, that tells me where to trade from. That setup never tells me to trade from that side, that's the key point. So, and now to dovetail this into my main point, am I looking for a rollover in here, or am I looking for that move up to the higher area, as highlighted in the ES? And can I use all these ABCD's and what happens off them for clues?
I wanted to show one example of one of these ABCD's, so the readers can find others and do the work, and watch how the areas are handled. So far the ABCD's have been 'seen' and have produced initial reactions. But, the moves down so far that I have seen have not looked impulsive, and the late day ramp (what a surprise that wasn't) sets this up to blow them all out. If they get blown out, I'd be thinking serious continuation. So, on the WFC chart I showed both scenarios. I also highlighted that the ABCD is coming off a key area, so that key area may exert more upward pressure than the smaller ABCD can exert to the downside.
On the other hand, if the ABCD can drive this below the key area, that's a significant failure. Take a look at a really strong one, FDX. It has a similar 'context', and all of the sudden is a really 'in favor' stock once again. What happens to it here tells me a lot. So, there is a lot going on right now, and many potential setups, trade premises, and clues. Next month we can talk about what happened. In the meantime, study this and watch it as it unfolds, so you are ready for my follow up.
Let's move on to gold, on the continuous futures contract, 240-minute, all-sessions.

Chart 5
Source: QCharts.com
Gold has just been all over the place. What I want the readers to see is how many sudden drops and ramps this had, just in this small time period. Yes, I do believe that gold is wildly manipulated, but I still feel it is tradable. This chart would look a lot 'cleaner', I think, shown on a tick chart (I encourage the readers to do a tick chart workup for this on their own), but for now I want to show how I can still find a setup on a time chart, with the illiquid overnight and the crazy, sudden moves.
On first blush this chart looks horrible, and I'd normally just move on to another issue, one without such sharp moves. But I like to do some work and see if an issue forms my patterns and 'likes' my areas. If so, and if it has reasonably smooth moves into a potential trade area (PTA) such that I can get a decent entry trigger, I won't pass the issue up as a candidate. Here I highlighted an area with the green hash mark where I see a pattern coming together, and my trained eye sees some other potential things that would also come together in this area, so I want to do some work and see what pops out. Generally speaking, despite the recent craziness in gold (and the currencies), I think it trades quite nicely.
Let me drop down to a 60-minute all-sessions chart, and I'll add on a slew of Fibs, some lines, and highlight the pattern.

Chart 6
Source: QCharts.com
Gold formed a pretty nice-looking ABCD, right at a tight Fib convergence area, with a lot of very key Fibs in there (there are certain Fibs numbers that I find more useful in certain situations, and different swing points have varying levels of significance to me, so the 'key' combinations are the ones I really want to see in my area of interest). I also had a lot of lines coming together at this area. You can see the one line that is the highest on the chart is actually two lines from two different techniques overlapping each other almost perfectly.
The area just 'popped out' at me on this one. If I don't have to squint at all, or cock my head and try to see it, I get real interested. And in case anyone was wondering, isn't this trading above the lines here? Yes, but not above the Fibs, and together they form an area, not an exact spot. I am more interested in how it acts right here than that the lines were slightly overshot in order to hit the Fibs.
Let me drop down to a 10-minute chart, add on some additional lines, and highlight something.

Chart 7
Source: QCharts.com
Let me first point out that I added two upsloping lines (in dark red) on the chart that come from the lower timeframes, and their purpose it to assist in the timing and more exact placement of the final area. These are specific lines using yet another technique that I show extensively to mentor students. I find them invaluable. Notice how they helped pinpoint the area. Also notice the 1.272 external retracement in there. This is one of two 1.272 external retracements that hit the area. I wanted to drop down to a 2-minute chart and show even more things, but didn't have the chart space. I suggest everyone do that on their own, and see there is yet one more 1.272 external retracement that falls in there from that timeframe.
Now, go back to last month's commentary and review the Euro example once again. Recall that inverted head and shoulders pattern I showed in the PTA. Now we have one here in this gold PTA. Granted, I use other techniques to get in trades besides a standard H&S pattern and the break of the neckline (as outlined in Kane Trading on: Entry Techniques, and covered in much greater detail in the mentorships), but you can see how much there is to work with here as this hits the area of the PTA.
Just look at the beauty of those swingpoints, the higher high, followed by the lower high, I just love this kind of behavior. It all comes together in this area, the 'context', the pattern, the Fibs, the lines, the entry trigger, and so on. Despite the crazy moves (and 'time skewing' from the all-sessions time chart), there still seems to be quite a few aspects of the behavior of this issue that are following the methodology.
Let's zoom out a bit and see what this one did from here, back on that 60-minute chart. I'll add on one basic Fib external retracement.

Chart 8
Source: QCharts.com
Gold continued to drop right off the PTA, did a few relatively small checkbacks, and then one of the famous plunge moves we have seen lately. But where did it go to? Right to the 1.618 external retracement off the pattern area, where it coincidentally came together with a key line I had on there. Note the similar retest of the area that we had in the Euro and in the PTA on this one here. Gosh, I really like swing points. As an aside, notice the rush right back up to the main line area that sent this down in the PTA. Very interesting.
Now, let me summarize what we just did, and the 'lesson' for today. Generally I prefer to 'hunt' among the issues that have really smooth, nice price action. I am looking for everything to behave as 'nice' as I can get, and if I don't have this, I'd usually prefer to just look elsewhere. But I think one can get too fussy, too overly critical. I think it is good to study a variety of issues and price behavior styles, and not have too many preconceived notions. Do the work and see what falls out, instead of being sure you know what will fall out. This gold setup is a great case in point.
At first glance the chart looks pretty awful to me. For certain styles of trading the chart may look ideal, but for a clean pattern seeking trend follower who wants a fair amount of confirmation in the entry area, this chart doesn't look ideal at first. Digging in showed me there might be some potential regardless. And how would I develop a feel for this issue before this specific setup? I'd see if I could find other setups right before this one, and see what those workups looked like, and how they played out (assuming I was not already familiar with this issue, which was not the case for me, since I follow gold on a daily, minute by minute basis). It's amazing what one can glean from a chart by doing a ton of work.
I hope today's commentary was useful for everyone. I tried hard to come up with another theme, another approach, to mix it up and provide some good content. In the grander scheme of things this example isn't really any different than the other ones I've shown, it only has a bit more wild price action interspersed with the more normal price action. The one thing that amazes me is how repetitive the process really is, how similar the approach is from issue to issue, timeframe to timeframe, from stocks to commodities to whatever. Once one has the basic skills down, for this or any methodology, the object is to just consistently apply them, routinely and regularly, over and over. Go to work and grind it out. That may not be as exciting as some make trading out to be, but I find some comfort in a consistent approach to the market. I hope others will benefit from studying this concept.
The next commentary will be next month's edition, posted by Sunday evening, September 5, 2010.
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