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The run up on the SPI200 had been quite strong since the low in mid March, until the May 19 top (6004). The sell-off from this top has provided a great trade, right out of one of our Time by Degrees dates and a great double top. What helps make it a great double top is what I want to focus on today. This week I have quite a technical article. Some will enjoy that - some might find it takes more than one read to digest, if so that’s great, as you would have grown a little in the process.
Chart 1 is the recent market action on the SPI200 daily bar chart. As you will see there is considerable detail on the chart. The double top of February 4 (6009) and 19 May (6004) was near perfect, in a ‘rugged’ way. Take a look then I’ll explain what I mean.
Chart 1 – SPI200 Feb-May 2008 Double Top Trade
click chart for more detail
What I mean by ‘rugged’ is that from a professional traders’ point of view the combination of things made it all close enough to perfect for complete clarity of thought. I’ll break down the details for you:
- The range from the all-time high of November 1 high (6880) to the March 17 low (5039) has a 50% retracement level of 5965. The May 19 top coming in at 6004, which was the only day that closed over 5965 (at 5971) made this a great area to be looking for resistance.
- The first range out from the March low was to the 5718 high, giving a reference range of 679 points. Adding 679 points to the next low at 5391, gives us a 100% target of 6070, certainly approaching the ‘winter of the trade’. This once again gives us strong resistance in the 6000 region.
Finally, the fact that the low before the second top (March 17), was lower than the low before the first top (January 22), is often something you look for in double top patterns.
- On the downside now there are a few tests. The March low is a good low; I’m certainly not calling the March low broken just yet. A couple of tests need to be passed before getting overly bearish, these include:
- An early test starts with a repeat of the last pullback from the 5718 high to the 5391 low (327 points) down from the May top. This gives a target of 5670 (6004 – 327).
- If the market breaks through and holds below 5670 then another test is the 50% milestone for the double tops at around 5519. Hold and close below here for a few days and the March low might be in trouble.
This trade is certainly one for the more experienced Safety in the Market trader with some advanced concepts coming into play. I have given you considerable detail on what made me keen on this double top.
The fact that this trade also had a considerable amount of ‘time’ reasons and very strong reasons from ‘squares’ also supporting it, makes it close to a perfect short set-up that has been rather kind to me – and perhaps for you?
Until next time...
Noel Campbell
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