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The recent articles in this series on Santos (STO:ASX) have been inspired by a lesson from the WD Gann Stock Market Course where he teaches his Mechanical Stock Trading Method and tests it over a 15-year period in US Steel. In the last section of the lesson he covers a situation very similar to ours in Santos last week. Here are Gann’s instructions on US Steel:
Cover all shorts and buy for long account at 135, because this is the 1/2 point between 8-3/8 and 261¾, being half of the life fluctuation and the strongest point since 150.
8-3/8 was the lowest price at which US Steel ever traded, in May 1904. 261¾ was the all-time high in September 1929 (these prices are still the all-time low and high for US Steel by the way). 135 was the 50% level or mid-point between these.
Chart 1 – Half-Point of Lifetime Range
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Chart 1 shows that the recent low on 21st May, Santos fell straight to this 50% level and then rebounded.
The quote from Gann also mentions that the price at 135 was ‘the strongest point since 150.’ This was another major 50% level, from a major low in 1915 to the all-time high in 1929. You can see from Chart 2 that the equivalent in Santos is the range from the 2003 low to the all-time high in 2008 that started our run of trades in February.
Chart 2 – Major Monthly Range
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In addition, the low of 21st May completed a repeat of the range from 27th March to 9th July 2009 – a significant range on the weekly chart. As you’ll remember from last week, it also hit the 1 x 2 trading day angle from the October 2008 low.
Chart 3 – Set-Up on 21 May
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Now that I have spent some time showing you the set-up, back to Gann’s instructions at the top of the article. He said ‘cover shorts and buy at 135’. Translating that to our situation, on 21st May, when Santos gapped down, opened just below the 1 x 2 angle and the major 50% level, and then moved up, we should take profits on all our short trades and go long. The exact price of the 50% level is 11.37. Last week I suggested covering shorts at 11.40, just to be certain.
With an account balance now of over $120,000, we would be able to take 50,000 CFDs and place stops 5 cents below the low of the day (just in case the market re-tests the low).
Chart 4 – Going Long
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On 25th May there was a higher swing bottom, confirmed on the 27th. Our rules would state to take an additional position here, as this is a First Higher Swing Bottom trade from the Number One Trading Plan.
On 1st June there was what appeared to be an Outside Continuation Day, which would also have given a signal to take an additional position. The next day, however, was actually a down day, so it became an Outside Reversal Day. We will take this up in the next issue, but note what Volume has been doing since the 21 May low.
Knowledge is Power!
Tim Walker
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