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Meteorology involves collecting large amounts of data from many different sources in order to predict what the weather will do. You might look at air temperature, satellite imagery, ocean temperatures, isobars and cloud formations to piece together a forecast. As you can imagine, it’s far easier to say what’s on the cards for tomorrow than what will happen on a certain day next year. It’s the same with trading. By drawing on many different data sources you can predict what a security is likely to do. The more confirmation you have from different sources, the more likely you are to be correct.
Back in May I wrote an article for Safety in the Market Platinum students about a double top on Paladin Resources (PDN.AX) entitled “Yellow Cake is a Little Stale”. I showed several Time and Price reasons why PDN should drop in price and offered several targets and prices to watch. It’s pleasing to see so many pieces of data come together, just like a weather forecast that proves accurate.
Despite PDN’s lack of earnings, the excitement surrounding Uranium mining made an expensive stock even more expensive. People who were little-versed in the fundamental analysis outlook regarding the stock were spreading broker’s recommendations like wildfire. PDN was to the resources market what Yahoo was to the tech boom – an overheated stock ready to cool off in a hurry!
Applying basic technical analysis to PDN revealed an obvious double top, and the subsequent head and shoulders formation (in this case the head was made up of two tops, rather than one) was a sure sign that market sentiment was beginning to turn. The declining OBV between the two significant tops was further confirmation. The signals were indicating a fall.
Chart 1 – PDN Daily Bar Chart
click chart for more detail
The fundamental and technical story was also in harmony with Elliot Wave. When you counted the second of the double tops as the end of the fifth impulse wave the next highest probability count pointed downward. The data told the tale, and gave away the likely ending.
click chart for more detail
In the case of PDN, Gann Time and Price analysis worked superbly well, as the balancing time projections illustrated. All the major tops (and the most recent top beginning the breakaway of the last two weeks) were coming in as forecasted. The data said a storm was coming. And so it has.
Stay Sharp,
John Jeffery
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