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Firstly I would like to say thankyou to all the readers who have given me their feedback on this series of articles I have been writing on Santos. All your comments are valued, and I am always very interested to receive them.
ABC trades have been hard to come by in STO recently. However, last week, on 23 November, the market kindly offered us an ABC short trade. Now at first glance this looked like a really good trade. In terms of the trade evaluation criteria that we teach at the Safety in the Market Trading Tactics and Interactive Trading Workshop, it satisfied the following points:
- The minor trend (daily) was in sympathy with the major trend (weekly);
- Point C retraced less than 50% of the A-B range (39%);
- The A-B swing was greater than the previous down-swing:
- The B-C swing was smaller than the previous up-swing;
- Volume increased from A to B, and decreased on the rally to Point C;
- Temperature on the day of Point C was -4;
- There was a gap between A and B;
- The market did 3 days down and 1 day up.
This is illustrated on Chart 1.
Chart 1 – ABC Short Trade Set-Up
click to enlarge
But there was one question mark over this trade. If you study last week’s article in Issue 336, you will notice that I spent some time discussing the 50% retracement level of the range from the 27 March top to the 9 July low. The market has traded within this range for the past 4 months, and had recently formed a double bottom on this 50% level. See Chart 2.
Chart 2 – Double Bottom on 50% Level
click to enlarge
So what do you do? You have what looks like a great trade, but you have a major support level just in front of you.
Look very carefully at Chart 2. Where is the 50% milestone of the ABC trade? Notice that the 50% level of the trade is reached just before the double bottom and 50% level of the recent major range. In other words, if the trade does fail at this level, you will have at least covered your risk. Indeed, this would be a good opportunity to use Index stops and lock in some profit at the 50% milestone.
So how did the trade fare? Well, you can see from Chart 3 that 24 Nov produced a ‘good outside day’, where the market initially traded above Point C, but then fell and got us in the trade. The next 2 days may have had you worried, but finally, on the 27th, prices vaulted over the major support level and went straight to our 100% profit target. This was the panic caused by the Dubai debt announcement. Were we worried? No way – we were trading with the trend, which was already down.
Chart 3 – Trade Result
click to enlarge
Another ABC short trade was signalled on 1 December. Using what we have covered about 50% retracement levels, see if you can spot why it took me less than 30 seconds to dismiss this trade.
Knowledge is Power!
Tim Walker
PS. For those who are confused by the fact that some of the early articles in this series show different prices for highs and lows to the later ones, please refer to Issue 309 for a discussion of the reasons why.
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