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The great Jesse Livermore (1877-1940), regarded by many as the greatest trader who ever lived, said: “Speculation (i.e. trading) is nothing more than anticipating coming movements”. We must have a view of where the market is going. He also said: “There are times when one should speculate, and just as surely there are times when one should not speculate”. If we are not sure where the market is going, it is quite OK to stand on the sidelines and watch and wait.
Let us continue the analysis of Santos (STO:ASX) that we began in Issue 241 of the Trading Tutors Newsletter. At the end of that article I mentioned that there were two unsuccessful ABC trades, and that there were reasons why you wouldn’t have taken the first one. Let me expand on that. The market ran up 64 days from the low of 16th August 2007 to the second of the double tops on 19th October. 63 Days later it made a low on 21st December. Of course we don’t know it is a low yet. We have to wait till the following Monday to confirm that. But we are on the lookout for a change when a time range repeats like that. Also the low came in close to the 61.8% Fibonacci retracement level.
Chart 1 – Santos Price and Time Set Up
click chart for more detail
So at this point we would be expecting a move upwards. We need a price range to look for, so we have a look at the last move up, from 16th November to 13th December. That gave us a price range of 14.83 – 13.02 = 1.83. Adding this to the low of 21st December (12.78) gives us a price target of 14.61.
Now, using ProfitSource software – with ABC Hi-lites on and using the walk-through mode – you can see that an ABC short trade showed up on 24th December. It wasn’t filled the next day, and a new Point C showed. That day was a strong move up, with a gap. Who likes the look of this as a short trade? The 28th is another strong up day. By now our Elliott Wave projection is looking upwards to a target of 16.91. It’s times like this when you want to be very careful about taking the ABC trade.
Chart 2 – Santos ABC Short Trade
click chart for more detail
The market keeps moving upwards for the next few days, and gives us an ABC long trade on 7th January, followed by an inside day on the 8th where it closed on its high. Our only reservation is that we have done just over 100% of that previous range, but let’s not be too wise after the event. We’d probably take the trade and get stopped out on the 10th.
It would be nice to think that we could have gone short here and taken advantage of the precipice that the whole market fell over in January, but again we are using 20:20 hindsight here. For some homework, though, take a close look at the Road Map Chart from the Smarter Starter Pack and revise the Trend Reversal Rule. But even if we had reversed positions and gone short after the breaking of Point C, we would have placed our stops over the previous swing top. On the 15th the market gapped up and would have stopped us out. The market then proceeded to do 150% of the previous range. Ouch!
Moving forward to the current state of play, we have an interesting set up. We had a double bottom on the 22nd and 31st January. 200% of the range between the double bottoms would give us a price target of 14.69. As this article is being written on 5th February, there is an ABC long trade set up, with the 100% price target at 14.64. By the time you read this article we may already know how successful it has been, but a cluster of price targets like this gives added confidence to take the trade.
Knowledge is power!
Tim Walker
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