|
We left off in Issue 343 with a very brief reference to the ‘Christmas Rally’. This is a very useful little pattern, to look for a run up from a mid-December low to a top in early January. It takes different forms in different years, but if you go back year by year over the history of Santos (STO:ASX) you will see that there is hardly a year when it didn’t manifest. If you cared to make a study of it, you could come up with a trading plan that would pay for your Christmas holidays and all the presents you’d like to buy every year!
In this issue I would like to focus on 2-Day Swing Charts. For those readers not familiar with a Swing Chart, it follows the move of prices up and down, changing direction every time the daily bar reverses from up to down or down to up. A 2-day chart is based on the same principle, except that it only changes direction when there is a reversal of 2 consecutive days.
The advantage of 2-day swing charts is that they remove a lot of the bumps from a 1-day move against the trend. So you tend to get a smoother pattern, which can avoid getting stopped out from a move that then continues as you had foreseen. It is also very useful for measuring ranges to get an idea of where prices may reach. For example, you can see in Chart 1 that the 27 November low which we have spoken about recently completed 100% of the previous 2-day swing range.
Chart 1 – 2-Day Swing Chart Repeating Range
click to enlarge
This would have helped your conviction that a rally was due at this point. To move forward, the next big move on the 2-day chart was the fall from the 2 December top to the 14 December low. This was followed by our Christmas rally. You will recall from Issue 343 that the 7 January top completed a 50% retracement of the run down from the 22 October top to the 14 December low.
Chart 2 – Short Trade from 7 January Top
click to enlarge
Study this chart carefully. The high of 7 January was 14.69, exactly on the 50% retracement level. It was an Outside Reversal Day, which is a Signal Day, and if you had been long over Christmas you should have either exited on the day or, at the very worst, placed your stop 1 cent under the low of the day.
But wait, there’s more! The outside day on 7 January counts as the first day down on the 2-day swing chart. If the next day is a down day, that makes the 2 days down required to turn the 2-day swing chart. Therefore, 1 cent below the low of the 7th would also be your Entry Stop for an ABC 2-Day short trade. If you had been long, you could have placed a stop for double your position size to reverse positions from long to short. And as you can see from Chart 3, the market fell short by only 1 cent from an exact 100% repetition of the 2-day range.
Chart 3 – How the Trade Unfolded
click to enlarge
Knowledge is Power!
Tim Walker
|