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When we last left Santos (STO:ASX) in Issue 309, it had suffered a significant sell-off in the aftermath of a 2-day trading halt due to a capital raising. The market was clearly oversold after falling 14.5% from the close of trading on 8 May to the close on 14 May. It then came back and made a first higher bottom on the 1-Day Swing Chart. I finished the analysis with the words, ‘this is yet again a time to watch this market carefully for a signal.’
Let’s follow this market through for the last 2 weeks. Chart 1 below recaps the situation.
Chart 1 – The Story So Far
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The low of 14 May formed a double bottom with the 16 March low. This was not your classic double bottom, from which you would expect a rally to 200% of the run between the bottoms. However, it was a strong support level, especially given that the 2 bottoms were roughly 60 days apart.
On 15 May an ABC short trade was signalled. This is not a trade you would have wanted to take. Why not? The first reason is that Point B of the trade was the double bottom mentioned above. Time and price harmony around Point B is definitely not what we want to see! And the second reason is the oversold condition of the market. The swing range of 2.59 is the largest on over 6 months on this stock, and would therefore be unlikely to repeat. Instead we wait for a signal to go long.
Chart 2 – ABC Short Trade
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On 18 May the market showed the potential of forming a higher swing bottom. A close look at the price action on this day shows that the market opened above the previous day’s close, fell nearly 50 cents, and then recovered all those losses to close above the open and on its high for the day.
For those using some Time by Degrees in your analysis, Santos was incorporated on 18 March 1954. Thus you would be looking around the 18th of each month for signs of a turn. However, the market was a bit too strong here, as on the morning of the 19th it gapped up, forming a 3-day island reversal pattern. This is a strong reversal signal, particularly when looked at in the context of the time and price harmony of the lows. Nevertheless, there was not a strong signal to enter the market.
The 50% point of the previous down swing was at 14.78. The market reached this level on 19 May, closing at that point and on the high of the day. Now was the time to watch for an ABC long trade to give an entry signal.
Chart 3 – First Higher Bottom
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A signal duly arrived on 21 May. The fact that the market had trouble breaking through that 50% level was balanced by the fact that it couldn’t close the gap from 18-19 May. And in order to enter the trade, the price would need to get to 14.81 (I cent above the high of the 21st), which is above the 50% point.
As it happened, the trade was not triggered, and the market headed lower the next day. This did give an ABC long trade signal. The volume was relatively low that day, and this would be a question on balance whether or not you considered the trade worth taking, given the gap down that day.
But notice that the trade was not signaled on the 22nd, as the range of the day was too large to enable an entry by 33%. Nor was there a trade signal the following day, despite the market forming an inside day. Finally, on 26 May, a trade was given. This day was not an inside day, but it only broke the previous day’s low by 1 cent.
The message here was that the market was forming itself for a good move. In such a case, when the market breaks out of the sideways days one way or the other, it will generally do so with some momentum.
Chart 4 – ABC Long Trade
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Entry was finally achieved on the 27th, but the market didn’t get underway until the 29th. Then it moved quickly, reaching the 100% milestone 2 days later. As of today (3 June) the market is signalling another ABC long trade. Over to you…
Knowledge is Power!
Tim Walker
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