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As I write this article on Wednesday 25 August, there has been a very interesting day’s market action in Santos (STO:ASX). But first let us step back a few days.
Chart 1 – Double Top Set Up
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On 18 August there was a nice little double top. The 50% resistance level you should recognise, as I mentioned it more than once in recent articles. But you may not have seen the 1 x 1 trading day angle, this time drawn from the 26 September 2008 high. The fact that the market reacted the last time it hit this angle on 12 April makes it more likely that it will react this time. It is not noted on this chart, but if you count the days between each of the double tops and the low in between them, you will find that there is only 1 day’s difference.
All looking good, so we watch for an entry signal. The market closed high that day, so there was no Signal Day and we could not use the Closer’s Rule. Which is just as well, because the next day it went higher and closed above the 1 x 1 angle! What’s going on here?
One indicator that it always pays to watch is Volume. In Chart 2 we consider the volume patterns in the period of the double top.
Chart 2 – Volume
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If you examine this chart closely you will see that volume increased during the move up from the 30 July low to mid-August. This is not what we would like to see. A better pattern would be for strong volume in the run down from 12 to 30 July. By analogy you can think of this as the A-B range of an ABC trade. We always want stronger volume from A-B than B-C. However, volume did weaken on the higher top day on 19 August.
So this might be a trade you would approach with caution. Nonetheless, the trading rules we have been using state that a double top or bottom on a 50% level is a signal for us, so we must follow our plan. What can you do to protect yourself if your plan indicates a trade but there are conflicting signals? Answer: trade with a smaller position size.
What entry signal would we use? Well, Gann often said that the safest place to go short is the first lower swing top, so we wait for that, and it duly arrives on 23 August.
Chart 3 – The Trade
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The market gapped down at the Open the next day, thus executing the trade. (For those more advanced traders, markets frequently close gaps before moving on, and it is possible to watch for a reversal around the top of the gap for a better entry price).
In early trade this morning, 25 August, things looked good. The overall market was down, Oil was down, and the Open was lower than yesterday’s Close. But then prices ran up to take out the swing top, before reversing back to close near the low of the day. We would be stopped out of the trade. Here again, if you were able to follow the market intra-day, you could look for a chance to re-enter, as the day’s high of 14.29 failed to break the 14.30 high of 19 August and in fact has now resulted in a triple top around that level.
All of which goes to prove that markets will have periods where they move in great harmony and follow the rules, as Santos did from February to early July, and other periods where they are frustrating and offer little in the way of great trades. But remember, there will always be another stock somewhere that is giving great trades, so don’t be afraid to cast your net a little wider.
Knowledge is Power!
Tim Walker
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