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I was recently asked about a setup on an Australian stock called Santos (ASX:STO) where the chart revealed both a double bottom and a double top. The question was which was the stronger setup, as both were on 50% levels of different ranges, as displayed inChart 1below:
Chart 1: STO daily bar chart showing double tops and bottoms
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If we zoom in on the double bottoms we can see there was in fact a triple bottom producing a couple of terrific ABC long trades, as shown in Chart 2. The first ran past 200% (as we would expect from a double bottom) and the second has pulled up at 150%. So after a nice profit going long, can we do an about-face and go short?
Chart 2: STO daily bar chart showing ABC long trades
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At this point I would like to give credit to my colleagues Tim and Andrew,with whom I discussed this stock. We acknowledged that when looking at a chart, the bigger picture analysis will give us bigger turns and we should give the bigger picture more consideration, particularly when forecasting. Chart 1indicates that the double tops have formed around 50% of a much bigger range than the double bottoms and we would expect some downside from here.
Our Trading Plans can have entry rules assimple as that: short double tops on 50%. But the swing chart is telling us the trend is still up. Perhaps waiting for a first lower swing top under the 50% level would provide a safer entry. In the meantime you might like to look for a price cluster or perhaps some Time reasons to support a short entry below the double tops.
Ranges resistance cards indicate the range from the 2000 low to the 2008 high supports the 50% level under the double bottoms as shown in Chart 3. Chart 4displays the range from the 1992 low to the 2008 high, which shows resistance above the double tops at 37.5% of the range. This is less significant than the 50%, but still clusters with the resistance shown in Chart 1.
Chart 3: STO Daily Bar Chart with Ranges Resistance Card
click to enlarge
\Chart 4: STO Daily Bar Chart with Ranges Resistance Card
click to enlarge
So while we have seen a nice move up from the double bottoms, we are now faced with double tops and should be prepared to take advantage of a change in trend. Watch for an overbalance of price ABC short or even just a first lower swing top entry. Of course, if the double tops are broken, this is a sign of strength and the market may well run to 200% of the double bottoms. We must be ready to reverse our position if this occurs, but there is no reason not to look short in the meantime.
It’s The Journey
Lauren Jones
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