|
It has been a while since we had a look at Santos (STO:ASX). Back in May we were looking at the 22 May top of 20.87 leading to at least a short-term pull-back. This happened, but it was a very short-term reversal. Soon afterwards the market leapt over this top and rushed up to the $22.00 mark, where it has held for the past month. Not much to trade in here. Let us have a look here at where we might expect a move like this to end.
In April this stock broke through its all-time high. This in itself is worthy of comment. Since last November the overall trend of the market has been down. However, there have been a handful of (mostly resource) stocks that have been having stellar runs since that time. Have a look at Macarthur Coal (MCC:ASX) and Incitec Pivot (IPL:ASX), both of which have more than doubled in value since last November and given some great ABC long trades.
Santos took longer to get going, but it has been extremely strong in the last 3 months. When a stock breaks above its all-time high, we have to work out what our price target will be. We won’t find old levels of price resistance, because there aren’t any. Sometimes this is described as a vacuum in prices, where there is no overhead resistance. You can see the effect of this in the speed with which Santos has moved forward since April.
At this time we pull out David Bowden’s Number One Trading Plan and study Chapter 11 on Price Forecasting. This is one of the most important (and profitable) sections you will ever study. David takes us through Gann’s resistance cards for highs, lows and ranges. Gann’s rule is that percentages of lows predict future highs. So therefore we will look to old lows to get an idea of where the top might be.
The first and most obvious place to start looking is the all-time low. This will apply on any stock or commodity that you are analysing. In the case of Santos this low was $2.27 on the 13 November 1992. A simple exercise in mathematics will show that 10 times this low gives a price of $22.70, very close to the current high of $22.34. Chart 1 illustrates this.
Chart 1 – All-Time Low Pressure Points
click chart for more detail
If you were studying this market you would calculate all the resistance levels from the 1992 low, to see whether there has been any other harmony from this low. If you do the exercise you will find that there has been, giving us added evidence that this is a significant price to be watching.
You would also look at other important lows. If you found other resistance levels coming out around the same price, that would be a stronger indication that we would expect a top around here. That is your homework if you’d like to learn something out of this exercise. I will only say briefly that the most recent low was $11.63 on the 22 and 31 January 2008. Twice this price gives $23.26. This is a slightly higher resistance level, but the fact that it is close gives us added confidence that we can expect some sort of a top here.
And this is the key. Like a detective putting a case together, the more evidence you can find for a turn in the market, the more chance you have of being right. The next thing which is important to look at is repeating ranges. Again this relates to the material in the Number One Trading Plan.
Using the ABC Pressure Points tool in ProfitSource, we measure major ranges on the Weekly Chart. In practice you would look at all the ranges, but in Chart 2 I have illustrated the range from March to October 2007. Projecting this range forward from the January 2008 lows gives us the 150% point at $22.48. Again this is close to our resistance levels calculated from the lows. If you look back to the Road Map Chart which is part of the Smarter Starter Pack you will see that 150% is the point to watch for a change in trend.
Chart 2 – Major Range on the Weekly Chart
click chart for more detail
So we have the elements in place to say that we might have a top here. Do we immediately go short? Absolutely not! As yet the market has not given us a signal. It is true that the upward move has been well and truly checked. But the trend on the daily swing chart is still uncertain, so we would at least wait for a break out from the sideways movement. It is well to remember that this could be down or up, so don’t be too hasty to fall in love with your analysis. Gann said to remember that you can always be wrong, which is why we use stop-loss orders. It is now that we change from our analysis of the big picture to looking for an entry signal for a trade. This is where your ABC trading from the Smarter Starter Pack and your advanced rules from the Number One Trading Plan will keep you safe and with the trend.
Knowledge is Power
Tim Walker
|