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Welcome all Safety in the Market traders to this month’s dedicated newsletter. Last month I wrote to you about the chance of a bounce on the SPI200 and therefore some of the key stocks of the ASX20, out of the 7 May low. This date was one of the Time by Degrees dates for the Australian market for May. As things worked out the market only bounced for a short period of time from this low (quite well in percentage terms) and then fell heavily into 21 May, another of the Time by Degrees dates for May.
The volume on the day of the 21 May low for the SPI200 was the highest it has been for many weeks (excluding roll-over volume) and this was the same for many stocks. High volume is indicative of a low that should be given some respect. Since the May low the market action has been erratic and very volatile to say the least. It has not been easy trading and if that’s how you’ve found it you would not be alone.
Falling into the 21 May low a number of the stocks we looked at continued to extend the first weekly down swing off the April tops. This extension moved them into what could be considered potentially oversold territory. Being oversold is one of the more advanced criteria we look at the Interactive Trading Workshop to warn of a potential failed trade. I know that two of the stocks I looked at with you last month including (BHP and ANZ) have confirmed ABC short entries on the weekly chart. The question is what is the probability of success for these trades considering the potential oversold nature of the A to B range? This month I want to talk to you about a plan how to handle things if these initial ABC weekly short trades are ambushed.
To flesh out the discussion I’m only going to pick one of the stocks in question for review, ANZ. That being said, what we discuss on ANZ can be transferred across BHP along with any other ASX20 stock showing similar patterns. Chart 1 is the weekly chart of ANZ marked up with the details I want to cover with you.
Chart 1 – ANZ Weekly Bar Chart – Current ABC Short
click chart to enlarge
The first part to consider is the large A to B range. A large A to B range can be both a good and bad thing. If the range is too large (abnormal) then it can make a trade inherently more risky. Of course it can also be the sign of a fast moving market. It is a subjective call at times. This weekly down swing from the April high can also be considered an ‘Overbalance in Price’ swing which will look at more later.
The Point B for the weekly ABC short can also be considered a double bottom with the February 2010 low. A reasonable bounce off this level is possible and the 50% retracement level (23.09) for the range from the top to the second of the bottoms (A to B) well worth watching. While Point C is very close to a 50% retracement it has pulled up just short. A re-test of this 50% retracement level could see an ambush of Point C.
Moving on to Chart 2 we have the weekly swing chart of ANZ since just prior to the 2009 bear market (cycle) low. Here you can see more clearly the fact that the recent down swing from the April top looks like an Overbalance in Price, which is a potential trend reversal indication.
Chart 2 – ANZ Weekly Swing Chart from late 2008
click chart to enlarge
The last up swing (Point B to C) is a range of $3.00. If the market does produce another upswing and in turn ambush Point C, but fails to close above $23.09 (weekly bar chart) and is a potential contracting swing compared to $3.00. You then might consider going short again treating the new swing high as Point C, using the same A to B range. This is essentially taking an advanced stance and ignoring a small swing between Points B and C. This again is something we spend more time at the Interactive Trading Workshop or Gann Jump Start Workshop. It takes more experience with advanced ABC trading and general swing trading to know when it may be worth taking this approach.
Those short on the initial ABC short have done the right thing and the trade fit the rules and needed to be taken. If this first ABC formation is ambushed that would normally be the end of it and a loss incurred. If the point of view is that ambush of Point C is a false break, considering we believe A to B to be an ‘Overbalance in Price’ on the weekly swing chart, then here is an opportunity to ‘dust yourself off’ and trade short again. The principle of an ‘Overbalance in Price’ is covered in your Number One Trading Plan and together with our traders at the Interactive Trading Workshop.
I will certainly keep you up date with what eventuates with the weekly swing charting trades we have discussed over the past two months and see what outcomes eventuate. I look forward to seeing some of you at an advanced workshop down the track. Remember it is your education, for your success.
Until next month...
Noel Campbell
Professional Derivatives Trader
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