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When we left Santos (STO:ASX) last time we were contemplating an ABC long trade that had a previous double bottom for support. Let’s refresh our memories:
Chart 1 – ABC Long Trade
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The fact that the 100% point of the trade came in under the 200% range from the double bottom gave added confidence that this could be a good trade. However, in the market as in life, things do not always work out as simply as we would like. The following morning, the market opened below Point C.
At this juncture we might cancel the trade and hope for a new Point C that day. Here is where the advanced entry strategies in the Number One Trading Plan can help us get on board. What we had this day was an Outside Reversal Day, where the market opened below Point C and then rallied strongly, later taking out the top of the Point C day and enabling us to get in the trade. As the market in general was not strong that day, this strong move is a good sign for us.
The market hovered for a couple of days around the 50% milestone, which was some cause for concern, as this was also the 50% point of the range from the most recent high on 4th Jan to the double bottoms on 22nd and 31st Jan. This is where sticking to the plan produces the winning result; as does not being greedy. When the trade reaches 100% on 18th Feb we exit and take our profits.
What happened next? On 21st Feb, Santos made its 6-monthly Earnings Announcement. This is always a time to keep a close eye on any stock you are trading, as it can have a significant effect.
Chart 2 – Santos Earnings Announcement
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For those of you with ValueGain there is a Company Earnings hi-lite which shows these dates. Santos’ report was a disappointing one, and it was punished accordingly. This was at a time when the Oil price (check the Futures/FX module) was moving strongly upwards, as were the prices of other Oil companies such as Woodside Petroleum (WPL:ASX).
Santos fell for a few days and gave an ABC Short trade signal on 27th Feb. On the surface it looked good – strong move with a gap from A to B. But note that Point B was higher than the double bottom back in January. Here is where we learn not to underestimate the strength of a double bottom. We would have to break through this support level in order to reach our 50% milestone, which is the break-even point for the trade, and this is not a good sign.
Chart 3 – Short Trade Against a Double Bottom
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Wisely, we let this trade go by, as it was stopped out the day after entry.
Since that time Santos has been moving consistently upward, and no 1-day swing bottom was broken through the whole of March and into early April. Unfortunately, it didn’t give much of a chance to get on board either. A nice ABC long signal came on 18th March, but was foiled when the market gapped up outside our entry limit on the 19th. The Open of the day was near the 66% milestone, and the market went down for the next 2 days. Although it eventually rallied and reached the 100% target, this is not a trade for those who wish to keep their trading accounts intact in the long term.
Chart 4 – The One That Got Away
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Looking into the future, we would want to have some sort of price target for the culmination of the current move. As the market has held above the January lows and exceeded the range of the rallies on the move down since October 2007, we would look for a repeat of the range from August to October 2007. This shows up best on a Weekly Chart, and gives us a target of $17.16.
Chart 5 – Price Forecast
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Note, however, that to get there we have to break through the previous double top from October, which is also the all-time high – a significant resistance point. So it would pay to be cautious at the present time.
Knowledge is Power!
Tim Walker
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