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WD Gann used to talk about a ‘campaign’ in the market. By this he meant that he would open a series of trades with a set up like the triple bottom we started from in Santos (STO:ASX) in February. He would then follow this move through until the market indicated that the run was over.
The question that arises, of course, is how do we know when the run is over? I will suggest 2 possible answers to this question. The first would be, after you have had a long run of winning trades, when you have the first loss. The second would be when a market that has been trending starts to go sideways.
Let’s have a look at the chart.
Chart 1 – Recent Market Action
click to enlarge
We went long on 26 February and traded the subsequent move up. After the sideways period in late March and early April we went short and traded the fall to 7 May. We were stopped out on the rally and went short again out of the 14 May top, holding in to the 21st, where we reversed and went long. After another little sideways movement in mid-June we went short and then were stopped out at the beginning of July.
Can you see that all of these trades were good trending moves? Then on 9 July there was the issue of the company announcement that we looked at last time. Note how the resistance level on 12 July has held since. There is nothing like a piece of news to muddy the waters for a while. That’s another good signal that it’s time to sit on the sidelines. The market has slowly worked lower and begun to close the gap. This is generally a signal that it will close it completely. As yet this has not happened.
If you had gone short at the first lower swing top after the resistance level was hit on 12 July, you would have been stopped out for a loss. Since that time the market has traded sideways and made 3 swing tops at the same level.
Chart 2 – Current Set Up
click to enlarge
As I write this article on Wednesday 4 August there is an ABC short trade showing. However, the market is currently open, so the latest price and volume bars are not complete. When you re-create this chart they will look different.
Having said that, notice how low the volume has been this week. The move down on Friday 30 July was on very strong volume, and this would suggest that the market will turn down again soon. However, it will be necessary to check today’s volume after the close of trading. The further prices move up and back into the sideways range, the more inclined we should be to let it go by and wait patiently for a breakout signal.
On the other hand, a reversal late in the day and a weak close, with volume remaining low, would have us assuming that prices will continue lower to close the gap.
Remember, don’t feel compelled to be in the market trading all the time. David Bowden said that most traders don’t take enough advantage of the fact that you can be out of the market, watching and waiting patiently for the right set up that will give you the highest probability trade.
Knowledge is Power!
Tim Walker
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