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Since last week we have seen Santos power away and continue to make higher levels. Since breaking above its all-time high of 16.08 set last October, it has now reached 20.19. The current range on the weekly chart has exceeded its previous runs, as we discussed last week. The fact that it has exceeded its former high by 4.00 marks this as a decisive break, which should see still higher prices in this stock.
A stock breaking into new high territory has no overhead resistance. There are no holders of stock who have bought it at this price before and may be looking to sell when it gets back to the price they bought it. Now, as we are looking at this from a trading rather than an investing perspective, we are looking for shorter term signals where we might take profits. Gann’s rule is that in a bull market it is safer to wait for a reaction and then buy rather than try to trade short in the reactions. So we would be looking for ABC long trades after a pull-back, either on the daily or weekly charts.
At times like this it is useful to compare a stock with what the general market is doing. Recently the market has been moving cautiously upwards from its lows in March. Santos, on the other hand, has been very strong. And in case you are worried that you can’t get stocks that go against the general trend, have a look at a chart of Incitec Pivot (IPL:ASX). In early November last year, when the rest of the market was making its top before falling 25%, or more in many cases, IPL was trading around 90.00. It is currently trading around 180.00. In other words, it has doubled in price in the past 6 months.
So where might we find resistance levels in the absence of any past history of trading at this level? One of Gann’s rules is that percentages of lows call future highs. In the Number One Trading Plan there are comprehensive lessons on creating Resistance Cards from previous lows to forecast when highs might come in.
There are several lows we could look at, but as an example let’s select the May 2003 low, which is a very significant low in this market. By creating a lows resistance card in ProfitSource, we find that 400% of the value of this low of 5.18 comes out at 20.72.
Chart 1 – Lows Resistance Card from May 2003 Low
click chart for more detail
So our current high is about 0.50 short of an exact multiple of this low. If you spend a bit of time studying this chart you can see how previous tops and bottoms have come out on multiples or percentages of this low.
Note also that the current price is around 20.00. Round numbers like this often create support and resistance, as people often buy and sell around these levels. Thirdly, if you refer back to my article in last week’s edition of the Trading Tutors Newsletter, you will note an important price target of 20.53.
Does this mean we will see a change in trend around 20.53 to 20.72? Not necessarily. But it should at least see a pull-back. So an ABC long trade at this juncture would be a lower probability trade. Then it will be a case of seeing what the market does, whether it continues to make higher tops and bottoms, or whether it makes lower tops and bottoms and has a more sustained downward move.
Knowledge is power!
Tim Walker
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