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Welcome to the Safety in the Market monthly newsletter, this calendar year has presented some great trading opportunities as we saw a major low form in March and some interim bottoms moving higher. Trusting in what the charts tell you can sometimes be a challenge.
In March many were too cautious to be long as they feared markets were heading lower and they were well founded in that view if reading the press and media’s views. Now we are in October and people are wondering if we can go higher as we have run so hard and fast into the area we see now just under the 5000 mark on the SPI 200. Remember if we had traded the run up from the March low this would have delivered excellent profits and when this top eventually comes in then we may get caught at the top being long as the market turns.
I do believe we are due some sort of correction of sorts, if we trade long into this eventual top we must be quick to cover any losses with stop losses, but it’s unlikely if you take the last ABC long into a string top that it would unwind the good profits you would have acquired whilst trading with the trend. This is the nature of a trend following system like ABC point and swing charts, you will get most of the trend but not all. That’s how it has to be.
Gann said that markets were never too high to buy and never too low to sell. This is an excellent way to think of markets as being on the sideline is not going to generate a profit but will keep you safe. One of the points I will be watching in our index will be two simple but powerful techniques. I will be watching important resistance points and watching for an overbalance in time. These are both techniques that David Bowden covers in detail in his study materials but let’s take a look at how these can be applied in the current market.
Firstly we can look at the Ranges Resistance Card and see where we sit in terms of the retracement against the selloff of 07 – 09. We see the market has climbed and we are getting close to the 50% level. For many in the world of technical analysis this level and percentage will be one to watch. It’s also close to a nice round number that can act as a psychological level in the market.
Chart 1 – Daily Bar Chart SPI200
click chart to enlarge
The second technique looks at the retracements less in price but more in time. Time is a concept that is more important than price to an advanced Gann trader. This may seem odd when you first start trading as price determines your profit or loss, but I would add if you get your timing right the price will often take care of itself.
Looking at Chart 2 we can measure the pullbacks in terms of price as well as time. The SPI 200 has really only had one decent area to be short this year, and that was through June into July. This pullback was flagged by a fall that was four straight days down. This has not been replicated in the movement up; we have seen only 2 or 3 day reversals (in a row). This has all been followed by buying support and markets running higher.
Chart 2 – Daily Bar Chart SPI200
click chart to enlarge
So how to make best use of this information? You may say if we wait for four straight days down we will have missed the top. This will be the case but you will have entered an area that would be far safer to look for short trades than the last 6 months.
If the market runs four days down it will have overbalanced in time, this could be a hint that a change in trend is in. The challenge is that it may not be four days it could be more or less. This is just a guide but a powerful one if you are at the right time and the price is backing you up.
Until then it may pay to stick with the trend and that is clearly up at this stage.
Good Trading
Aaron Lynch
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