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Every so often I receive an email from a reader with feedback on this series of articles on Santos (STO:ASX). I always appreciate them, and if you have anything you’d particularly like me to cover, please let me know. One reader very gently pointed out that I inaccurately labeled a recent top ‘22 June’ instead of ‘22 July’ in my last article, which just goes to show that you should always check your work!
That reader also shared some thoughts about the recent market action in Santos, and how you might handle it from a trading perspective. Chart 1 is a very busy chart with a fir bit of information on the major recent pressure points in Santos. I will explain what it is and then we will look forward.
Chart 1 – Summary of the Market
click to enlarge
First you can see that the bear market range from 3 June to 17 October 2008 is marked. The 50% level, or mid-point, of this range is marked with an orange line. If you look closely you can see that the recent market action highlighted by the circle kept bumping its head against this resistance level.
The next level of 62.5% of the range is also marked. See how the 27 March top hit this resistance level, at the point where it intersected with the 2 x 1 trading day angle from the 3 June top. I have discussed the construction of this angle in recent articles, so I won’t review it here. But the point is that where you have 2 resistance lines intersecting like this, it is a more powerful indication of a change in trend. For those who have done some studies of time analysis, note that this top was 6 months from the 26 September top, which also hit the same 2 x 1 angle.
Also watch carefully how that 2 x 1 angle from the all-time high created resistance for the market in May and June 09, and that during July price action slowly worked its way through the angle in a sideways formation.
Let us now look more closely at this pattern.
Chart 2 – Recent Sideways Pattern
click to enlarge
I have marked the dates of recent tops and bottoms on this chart. I’m not going to go through them here, but for those who are keen, have a look for any relationships between these that could give you a hint of what might happen. In a future article we will talk more about time.
Note the area inscribed by the Rectangle. What would you be thinking as this was unfolding? Would you be trading it? Not using ABC trading as such! Remember that the best ABC trades come when there is a strong trend, and that we do not have here. But there is an entry strategy that comes to our aid. In the Number One Trading Plan there is a section entitled ‘Breaking of Multiple Bar Tops and Bottoms.’
Have a look at the area in the rectangle in Chart 2. See how there are a total of 4 tops around the same 50% resistance level we looked at in Chart 1. Also see how there are 3 lows at the bottom of the rectangle. You wait for the market to break out one way or the other, and you want to see strong volume when it does.
Chart 3 – Trading the Break-Out
click to enlarge
In Chart 3 I have included Volume, which you can see picked up in the days following the last low on 18 August. You would enter the market long on 24 August, as it broke the highest of the tops in the rectangle. This was the 22 July top of 15.16.
On the 24th the Open was 15.25. If you had your order in to buy on stop at 15.17 (one cent above the highest top) you would have been filled on the Open price. Alternatively, if you preferred to watch the market and saw that it failed to close the gap it made that day, you could have entered later in the morning using the Openers rule.
Now, where do you place your stops, and how do you calculate your milestones? To work out milestones, you can use the range of the most recent run. The manual ABC tool allows you to do this. But if you look closely, you are entering past the 33% milestone, so you can’t place stops all the way below Point C.
Other options include placing them below the most recent swing low, which would be the 14.60 low of 20 August, below the close of the previous day (14.78 on 21 August), beneath the low of the gap (15.05 on 21 August) or under the low of the day you entered, once that was confirmed (15.20 on 24 August).
There was a very strong move on Monday 24 August, and as of today, Tuesday, the market has come off a little. You can see from Chart 2 that it is close to the 3 x 1 angle from the October low, which may explain that, and is one reason for keeping stops closer. Nevertheless, after a lengthy sideways move like that we would expect the market to have a good run, and would look towards 16.63 for a price target.
Knowledge is Power!
Tim Walker
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