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In my last article in Trading Tutors Newsletter Issue #315 I mentioned that the lower tops on the chart of Santos (STO:ASX) since the high of 27 March might be an indication for lower prices in Crude Oil. This has indeed proved to be the case, and the continued weakness in Santos has been reinforced by two Island Reversal patterns. This is indicated in the chart below.
Chart 1 – Recent Island Reversal Pattern
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For those not familiar with Island Reversals, this is a pattern formed on a price chart where there is a gap up, followed by a gap down, leaving one or more bars isolated in an ‘island’.
If you had taken the ABC short trade on 19 June, you would have benefited from the first of these two islands as the market gapped down on 23 June. However, the impetus in the trade was short lived, as it stalled around the 50% milestone. If you have done some study of time in Gann analysis, you would know that around the 22 June is very important to watch for changes in trend, even if only for a few days.
Armed with this information, the Index style of Stop Management would have been the one to use, as that would lock in some profit once the trade reached the 50% milestone.
Chart 2 – ABC Short Trade
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If you calculated the Average Range over 6 months, you would have had your stop 16 cents above the 50% milestone, in other words at $14.33. This would have seen you stopped out at the Open on 29 June at $14.36, for a profit of approximately $0.41 per CFD.
Following the market on, the next ABC short trade was signalled on 10 July. At first glance this looked like a good trade, with a nice run down from Point A on 2 July with some gaps, breaking the double bottoms on 16 March and 14 May. Point C even sat underneath these lows, so you would be expecting support to become resistance.
Chart 3 – Latest ABC Trade
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The entry was triggered on 13 July, and looked good with a low close, and yet on the 14th the market turned higher, confirming that ‘Point B’ of the trade was actually a turning point and a place to be going long.
How could you be prepared for this and so avoid the losing trade? This is where analysis of the bigger picture in price helps, using Resistance Cards as some previous articles have covered. More importantly knowledge of Time is important. What I’m going to show you here is a technique that combines Price and Time. It is similar to a trend line and was called by Gann a Geometric Angle. It is a line drawn from a high or low that moves a set amount of price (say 1 cent ) in a set period of time (say 1 day). A line moving 1 cent in 1 day would be called a 1 x 1 line. A line moving 2 cents in 1 day would be called a 2 x 1 line, and so on.
Just as with a trend line, you look for the market to find support or resistance when it reaches these angles. To see their effectiveness, take a look at Chart 4 below, showing an angle of 2 x 1 from the all-time high of 20.63 made on 3 June 2008. You can see that every time the market has hit this angle since the high, it has been a short sale.
Chart 4 – Geometric Angle
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Now compare Chart 5 below, which shows angles from the October 2008 low. Here I have used the Gann Fan drawing tool from ProfitSource, which illustrates a number of different angles.
Chart 5 – Angle from the October 2008 Low
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You can see that the 4 x 1 angle, moving 4 cents per day, supported the market throughout the early months of 2009. Note the top of 10 June 2009, and compare it to Chart 4 above, which shows that the market on this day also found resistance on the angle from the all-time high.
Study this chart carefully and you will see how these angles would have helped you in your trading and would have warned you to be cautious about the most recent ABC trade. To learn more about using Angles in ABC trading, come along to one of the Gann Jump Start Workshops.
Knowledge is Power!
Tim Walker
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