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This is a topic that has been covered in Trading Tutors Newsletters many times before. However, it is so important that it is worth covering again. Both WD Gann and David Bowden say that 50% of any range is the strongest resistance and support level. Gann goes so far as to say you can beat the market with this one rule alone. That is perhaps a bit of an exaggeration for the beginning trader; however anyone will find it beneficial to watch for 50% retracements of previous ranges in his or her analysis.
I would like to illustrate this by looking at a recent trade in Santos (STO:ASX) which was identified in a market scan in a recent Interactive Trading Workshop. This was an ABC Long trade, as shown in Chart 1 below.
Chart 1 – ABC Long Trade in Santos
click to enlarge
You can see that I have highlighted the ranges on the swing chart. The upward range increased from $1.49 to $2.08, a sign of strength. The downward range contracted, from $1.27 to $0.80, again a sign of upward momentum. Also note that the retracement from Point B to Point C was only 38% of the range from Point A to Point B (the $2.08 range).
Looking at the bigger picture in Chart 2, there are other reasons in favour of this trade.
Chart 2- Looing at the Bigger Picture
click to enlarge
The 50% level of the precipitous fall from the 26 September 2008 top to the 17 October low provided resistance 6 times as the market tried to rally. But each time the market made a higher bottom as it came back to have another go at breaking through. The tops also were slowly climbing higher, and on 27 February had even managed to close above the 50% point.
This could be a situation to enter using the ‘breaking of multiple bar tops’ strategy taught in the Number One Trading Plan. However a safer entry would be to wait for an ABC long trade after the breaking of the tops, which is the situation here.
For some extra confirmation, Chart 3 shows Time by Degrees working back from Point A. There is considerable harmony here, suggesting the start of a move. I have circled the ‘hits’, most of which come within a day of the ideal date for a turn.
Chart 3 – Time by Degrees
click to enlarge
So how did we go? Well, just to prove that the market will sometimes do the opposite of what it’s expected to do, we got in the trade the next day after Point C, and then were stopped out the next day. Why did this happen? Well, as Chart 4 shows, although the price broke through the 50% level of the September-October range, there was another 50% level which it hadn’t broken through.
Chart 4 – Range From The All-Time High
click to enlarge
This was the range from the all-time high on 3 June 2008 to the low in October. As this was a range on a bigger picture, and as it involved the highest price in history of Santos, it was an important one to watch. This shows the importance of calculations that incorporate the all-time high or all-time low price, and also illustrates the power of the 50% resistance level to pull up the market.
If you examine Chart 4 closely you can see that the overall analysis still holds, however. A simple trend line joining the rising lows from December to March shows that the trend is still up. Although Point C was broken, the 37.5% level of the June to October range, along with this trend line, provided support. So the Time by Degrees indications still hold, with the low of Point A remaining intact. Thus, despite the failure of this individual trade, we are still looking for higher prices in this market.
Knowledge is Power!
Tim Walker
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