|
In Issue No 265 of the Trading Tutors Newsletter we identified the price of $22.34 on 3rd June 2008 as a potential top in Santos (STO:ASX). The first reason for this was that the price was just short of being exactly 10 times the all-time low price of $2.27 made in 1992. The second was that the recent advance had covered 150% of a previous range on the Weekly chart, and we noted that 150% is the point to watch for a change in trend. We also saw that the market at that time was trading sideways, and so had not given us a signal whether to go long or short.
Subsequent market action has shown that we were correct in identifying this price as a top. Now let us look at what we can do to make some money out of it, as that is the object of the exercise! Here we will assume all our work up to the top on 3rd June and focus on what happened after that date. As we were looking at the price of $22.34 as being a significant top, we will look for short trades.
The first signal we were given was an ABC short trade on 13th June. Point C had retraced 92% of the A-B range. The market took 2 trading days to get from A to B, and a further 5 to get from B to C. The upward range on the 1-day Swing Chart was contracting, but only just, and the major (weekly) trend was up. Our rules are telling us that this is a low probability trade. In the end the trade reached 50%, so we would have broken even if we had taken it, but we want better set-ups than this.
Chart 1 – Trade 1 ABC Short
click chart for more detail
As the days turned into weeks in the month of June, nothing much happened. The market was trading with a range, which was defined by the A and B points of our Trade 1. We should also note that there was a price gap from 28th to 29th May. The market tried to close the gap on the 30th, and again on 5th June. Both times it made some inroads, but failed to close it completely. We need to be aware of this gap, as it may act as support later. However, the fact that the market has started to close the gap will tend to indicate that it will eventually finish doing so.
As June drew to a close, the range of trading narrowed, indicating that a breakout one way or the other was imminent. Those of you who own David Bowden’s Ultimate Gann Course might want to review Chapter 2, where he discusses trading this pattern and the pitfalls to watch out for. But for us, we might be thinking of our rules for the breaking of multiple bar chart bottoms from the Number One Trading Plan.
There are 3 lows on the 5th, 17th and 20th June. It is not the best text-book example, but we have to work with what we are given. On 1st July there was a strong down move which broke 2 of these lows and closed lower than any of them. An aggressive trade entry would be to go short using the Closer’s Rule on that day.
What about a place to take profits? Managing a trade like this can be a tricky affair. In the case of a breakout from a sideways range, we are expecting a strong move, so one option is to move our stop loss order each day to 1 point above the high of the previous day. In this way you can see that we would have been taken out on the Open on 11th July.
Chart 2 – Trade 2 – Trading the Breakout
click chart for more detail
Since then the market has given an ABC short trade. According to the Additional Contracts Rule in the Smarter Starter Pack we have a strongly trending market and can legitimately add to our position when the market takes out Point B. At the time of writing the trade has reached the 50% point and given the additional contracts signal.
Knowledge is Power!
Tim Walker
|