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Last Friday, 9 July, an article appeared in the Australian Financial Review suggesting that Santos (STO:ASX) was on the verge of a multi-billion dollar deal to sell liquefied natural gas to Shell, Sinopec and Kogas. The stock price responded by shooting upwards, notwithstanding that the company itself said that the deal was not confirmed. On Monday 12 July, news services reported that Santos had been given a ‘buy’ recommendation by brokers and the price rallied further.
We were already out of our short position, as mentioned in Issue 367. There was a higher swing bottom and in theory it was possible to be long, but the trading plan rules I have been using did not indicate it and so we assume we were out of the market when the report came out.
Chart 1 – Announcement
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I am not a fundamental analyst and I do not base my trading decisions on company announcements, newspaper reports or brokers’ recommendations. However, I did read the following quote from WD Gann’s book How To Make Profits In Commodities over the weekend, which I found interesting:
As a rule, these unexpected events are not unexpected to someone on the inside, because someone knows something about news of this kind in advance and anticipates it…When bad news is out it is time to buy. When good news is out it is time to sell… (pp.22-23)
So that sent me looking at my charts, and if you have been following these articles for any length of time you won’t be surprised to know that I was searching for 50% retracements. And guess what, I found two!
Chart 2 – 50% Resistance Levels
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As always I am going to the Weekly Chart to look for major ranges. You can see the two that I have used. The 50% levels are 14.40 and 14.17. The rule when you have two or more resistance levels like this is to take the average of them, which would be 14.29. On Monday 12 July price peaked at 14.26, almost exactly on the average price.
Now what do we do about it? If you were on the ball enough (or lucky enough) to be in the market long when the move happened, I would at the very least have my stop under the low of 12 July, ie. at 13.84. You would be stopped out the next day. There would also be nothing wrong with taking profits and going out for an expensive dinner to celebrate.
The one thing I wouldn’t be doing is getting in the market short – yet. If you look at Chart 3 below you can see that there is some very good Time by Degrees harmony, which certainly gets my interest for a short set-up. I have labelled some of these on the chart, and I have rounded them – the figures are not exact. If you take the trouble to re-create the chart for yourself you will understand it a bit better.
Chart 3 – Time By Degrees
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Now is the time to go back to our Trading Plan rules and look for what our next entry signal might be. Certainly an Overbalance in Price Trade is one I would be watching for.
Knowledge is Power!
Tim Walker
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