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When last we looked at Santos (STO:ASX) the price was getting close to the all-time high of 16.08 set last October. The market was looking strong, but we had to be careful as it was nearing an important resistance level. The subsequent action has confirmed this strength, as the high was broken and price has since powered onto new highs well over 18.00.
Our next question becomes ‘where will the market go to next?’ How far can we expect this run to go? In order to answer this question we need to look at a bigger picture than the daily chart will tell us, so we must go to the weekly chart.
Our first indication is based on a rule known as the Tubbs Swing Rule. Look back through the Trading Tutors Newsletter archive and you will find some articles on Tubbs. The Swing Rule states that if a market has made a top and fallen below and then later comes and breaks above the old top, it will go about as high above the old top as it has previously been below it. This can be either in a full percentage (i.e. 100%) or a proportion such as 50% or 75%.
The Tubbs 2-Point Swing Rule exists as a tool in ProfitSource, in the Drawing Tools menu.
Chart 1 – Tubbs 2-Point Swing Rule
click chart for more detail
Already we can see that the market hit the 50% level and has reacted. This does not mean that it will stop there. It may go higher. Our eventual target would be 20.53. But as you can see on the run down from the October double top to the January double bottom, it wasn’t a straight down move. There were substantial moves up and down during that time.
Since the February low (which was a higher bottom than the double bottom in January – a sign of strength) the market has gone pretty well straight up. So we need to look carefully to see if we might be due for a shorter-term pull-back.
To do this we will go back to our ABC theory from the Number One Trading Plan. We are looking for major ranges to repeat on the weekly chart. The two most recent major weekly ranges are the March-July and August-October 2007 runs. We compare them to the current range using the ABC Pressure Points tool.
Chart 2 – Repeating Ranges on the Weekly Chart
click chart for more detail
In practice you would look at both these ranges, but I have shown the larger of the two projected from the February low. As you can see the market has exceeded the previous range. This shows that it is strong, particularly as the Oil price is also strong at present. A stock will not necessarily follow the price of a commodity it is heavily involved with, as there are other factors involved, such as the local economy, the management and financial status of the company, and so on. However, it is a key factor.
Note that in the March-July 2007 run, there was only one down week, and it was near the end of the run. In the August-October run the first time a weekly low was broken (on the bar chart, not the swing chart) it signalled that the run was over. In this run we have had an outside week, and our current (incomplete) week is at the time of writing a down week. By the time you are reading this article the week will be complete and we will know if it is a down week. If so we should be getting close to the end of this run and ready for a pull-back.
Knowledge is power!
Tim Walker
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