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In this article we will continue our journey through Santos (STO:ASX). For those coming across this series for the first time, you may like to go back through the Trading Tutors Newsletter archive, although it is by no means necessary to do so to understand this article.
My intention in writing on the same stock is to demonstrate that you can build up your knowledge of a market by continuing to follow it over a period of time. Generally I only use techniques covered in the Smarter Starter Pack or the Number One Trading Plan. For the maximum benefit of any articles you read, go and recreate the charts for yourself in ProfitSource. Remember that we learn by doing.
In a recent article we discussed the top that formed in June 2008. The market traded in a sideways range for the best part of a month before breaking out to the downside. At this point we would be looking to be short. But first we should have a feeling of where the market will go to.
In Chart 1 we are looking at the 50% resistance levels from the June top to the previous 3 major lows. We would calculate all 3, as they are fairly close together. We would also average the 3 prices, which would give us a cluster price of $16.34.
Chart 1 – 50% Resistance Levels
click to enlarge
With these levels in mind, we are happy to be short if our price target comes in before the market reaches the 50% level. When we last looked at this market the ABC trade on 15th July had just reached the 50% milestone for the trade. As you can see from Chart 2, we were stopped out after the 75% milestone, whatever stop strategy was used, as the market had a strong rally. Note that this means that our A-B range is now contracting, while our B-C range is expanding, a sign that the move may be running out of steam.
Chart 2 – ABC Short Trade
click to enlarge
This may induce us not to take the next ABC trade, which came in on 31st July. However, Gann’s rule is that markets tend to move in 3 sections, so we could expect one more leg down. This is indeed what happened, and that ABC trade reached 100%. The low eventually came in on 6th August at 15.92. Note from Chart 2 that the 100% point of the previous ABC trade was $15.95. In other words, even though we were stopped out of our trade after the 75% milestone, the 100% point called the end of the run. If you refer back to Chart 1, you can see that there was an old top of $16.08 in October 2007, which acted as support here.
Since then we have had an ABC long trade which reached 75% and a short trade which failed, although you would be unlikely to take that, given the large gap up from B to C. I’ll leave you to go through these and apply the same analysis that we have used above.
Knowledge is Power!
Tim Walker
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