|
Are we in a bear market rally or a new bull market? What stock is best to invest or trade in? Is it going up or down from here? In this article we are going to have a look at the current position of Santos (STO:ASX) and how we would analyse its prospects.
In Chart 1 I have overlaid the charts of Santos and Woodside Petroleum with the chart for Crude Oil futures. This enables us to compare a number of markets in the same sector.
Chart 1 – Comparing Markets
click to enlarge
Here you can see that the two oil companies made highs in mid-2008 around the same time that Oil peaked. Then Santos made a low in October, earlier than the others, and has since rallied much more strongly. Thus it is relatively in a stronger position than other markets in its sector.
Similarly, if we were to compare Santos with the ASX 200 index, we would see that Santos made its low in October and has been making higher bottoms since, while the broader market made a low in November and a slightly lower low in March this year before powering up in the last month.
Thus our first indication is that Santos is relatively in a strong position. Now let us have a look at where it is sitting on its own chart. This is best done looking at a weekly chart.
Chart 2 – Previous Tops and Bottoms
click to enlarge
The first point to emphasise about Chart 2 is that this article is being written on Wednesday morning, so the latest bar on the weekly chart only has the data for the first 2 days of the week. However, it does present an interesting situation. The current price is at the same level as the tops of October 2007, which was the all-time high at that time, as well as the low of August 2008. This is an example of where old tops can become new bottoms. The price is also a round-dollar figure, namely $16.00.
Chart 3 – Recent Range
click to enlarge
In Chart 3 we can look at the recent major range between the all-time high in June 2008 and the low in October. We see that the 50% or half-way point of this range is $16.22, which is right around the level where the market is currently trading.
What is this all telling us? Gann says that 50% of any range is the strongest level to expect support or resistance. Couple this with the previous tops and bottoms around the same price and the fact that Santos is out-performing its sector and the general market, and we would expect to see higher prices in this stock.
But it is also telling us to be cautious at this time. While the market is around strong support points, it is yet to confirm that it is turning to the upside. The flipside to strong support is that if the market breaks under that level, it is a sign of considerable weakness.
So in summary, look for a signal from the market as to what it is going to do next. If it can confirm a weekly swing bottom at this level or only marginally lower, long trades will be in order. But if it goes lower, we would be looking for short trades. As David Bowden says, ‘don’t be anticipatory stupid!’
Knowledge is power!
Tim Walker
|