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At a recent two-day Trading Tactics class in Melbourne, a student asked about shorting a possible double top on Westpac (ASX:WBC). At first glance I had a few concerns with this trade.
Chart 1 indicates a daily chart potential double top. But the swing chart showed the size of the range was quite large for a one-day swing, so we would possibly look at a longer timeframe, starting with a two-day swing, then three-day, then weekly. The other concern was the gap from B-C. We look for gaps in the direction of the trade, not in the retracement, so this wasn’t supporting a short trade. Chart 1: Westpac Daily Bar Chart with Potential Double Top Pattern
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As it turned out, the market moved up from here and there was no longer a double top. On the weekly chart however, an ABC short formed over the following week, which might have interested a few traders. On the weekly swing chart we saw expanding downward ranges and contracting upward ranges, though the trend was uncertain. If you have ProfitSource, check out this swing chart yourself. Looking at resistance cards on the bar chart, I found it interesting that point C was sitting around the 50% level of the ’09 - ‘10 range, with entry clearly under the 50% as shown in Chart 2 below: Chart 2: Westpac Weekly Bar Chart with Weekly Short Setup
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Was there anything else supporting this weekly short? The retracement was around 50% in price and 50% in time (measured in weeks) but Volume was neither for nor against the trade. We could enter before 25% - creating a lower risk trade - but remember weekly trades can run for weeks, which means this trade could run well into the New Year. If you like a weekly setup, you must be prepared to be patient while the bigger timeframe plays out.
Fast forward now to the time of writing and we can see from Chart 3 that the trade hasn’t yet reached 50%, but attempts at a Christmas rally on the 19th and again on the 29th could well be completed without stopping out any weekly shorts. Chart 3: Westpac Bar Chart with Weekly Trade
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When you are stalking a setup, the market doesn’t always do exactly what you expect. You must be prepared to examine setups from different perspectives and watch both the big and small picture timeframes on the swing charts and the bar charts to complete an analysis. And as the market unfolds, adjust your view accordingly.
I will be watching this weekly short trade for an indication of strength or weakness in Westpac as there may be another shorting opportunity in the near future.
It’s the Journey
Lauren Jones
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