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Last month we talked about some profitable short trades on Australian stocks that were potentially the formation of a first section down from the April high. This had us on the lookout for another shorting opportunity if we were to see another section down in the market. Taking a look at some of the banks we see there were some shorting opportunities but not the straightforward ABC variety.
A client was recently asking about ANZ. He had seen what he thought was a nice double top form below a gap on 6/5 and 16/6, but was stopped out when the market moved up into the gap on 21/6. Refer Chart 1.
Chart 1 – ANZ Daily Bar Chart
click chart to enlarge
As 6/5 wasn’t actually a swing top, I reminded him that sometimes markets attempt to close a gap before moving back down and to be on the lookout for another entry opportunity. Some of the reasons I suggested that he look out for another shorting opportunity were in the bigger picture. Noel Campbell wrote about this in last month’s SITM Monthly newsletter. If the whole market was looking for another leg down, then a 50% retracement in time and price would be a good place to find it. Referring to Chart 2 can you see some balancing of time and price?
Chart 2 – ANZ Daily Bar Chart
click chart to enlarge
For added confirmation, let’s look at our resistance cards. We see this setup is sitting nicely under 75% of the ATH resistance card (Chart 3) and at 200% of the 2009 low (Chart 4). This is a price cluster right through our gap.
Chart 3 – ANZ Highs Resistance Card
click chart to enlarge
Chart 4 – ANZ Lows Resistance Card
click chart to enlarge
Now how would we trade it? We could have looked to enter using the opener’s rule on seeing it gap down on 23/6, as this created a 2-day island reversal, and placing our stop behind the close of 22/6. If we waited for a lower swing top, entry on 25/6 was outside limits so we would probably have to let this one go. Refer also to Noel’s article from last month for the weekly perspective on ANZ.
Chart 5 – ANZ Daily Bar Chart
click chart to enlarge
For big picture milestones we could place manual ABC points on the previous range down from 15 April, but this is a very large range and hence unlikely to repeat in one move. Alternatively we could use the last 1 day swing range and perhaps trail part of our position behind daily swing tops. As you can see in Chart 6 we have just passed 75% of the previous range down at the time of writing. If we took our profits at 75% we would be looking at approximately 7:1 reward to risk ratio.
Chart 6 – ANZ – Daily Bar Chart with Swing Overlay
click chart to enlarge
As an exercise, go back and have a look at the other bank stocks. NAB and WBC follow similar patterns, but analysis of each showed different harmonies, and each stock would have to be traded differently. Look for gaps. Look for 50% retracements. Check out the resistance cards. See if you can work out what you would have done, and next time you see a setup like this you might be ready to trade it.
It’s the Journey
Lauren Jones
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