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Many Safety in the Market students have been stalking Australian banks recently, due to the nature of the setups on the bigger picture. One of these is Macquarie Group (MQG:ASX), a financial stock that I loosely class as a bank.
I covered this recently in an article entitled Is it 'Mac' Time?, in which we discussed a potential double top setup. This setup has since broken to the upside, but with some interesting subsequent action. Chart 1 below illustrates the daily chart with the double tops in March and September. I suggest you also take a look at this on the weekly chart.
Chart 1: MQG Daily Bar Chart Showing Break Above Double Tops
click to enlarge
If you had been watching the market on 18 October, there was a possible entry on the breaking of the double tops; and if you have been trading MGQ long since August, you might have been on the most recent ABC long from 12 October. What happened after the breakout was of great interest to me as I was watching for the market to use the previous resistance as support for the next trade entry.
As you can see in Chart 2 below, an ABC long appeared on 25 October with a 63% retracement but with point C essentially sitting on the old double tops, and on 200% of the 2009 low and 150% of the 2011 low. What was once resistance was becoming support. The only thing in the way was the 50% of the 2011 range and interestingly, as this lined up with 50% of the trade, you could have been excused for thinking that this trade could fail at 50%. But think about this for a minute: If the trade fails at 50%, we should be at a break-even position and hence not make a loss. Is this a trade you would consider?
There was also a gap from B to C - which I do not usually like to see in my ABC trades - but the strong move on the 26th, which was backed by solid volume, might have provided the confirmation you needed. Time by Degrees® (for those who have studied it) also showed strong correlation with point C. At the time of writing (11am, Wednesday) the market has just opened and the trade has reached the 75% milestone. As entry was possible well before 25%, this might be a good place to take profits on a nice 2:1 reward to risk ratio.
Chart 2: ABC Long Trade on MQG
click to enlarge
Wednesday’s early market action made a clear break above the 50% milestone of the 2001 Range and also gapped above 75% of the run up from September, 2011 to March, 2012. This could be considered a ‘first section out’, and is shown in Chart 3. If there is a reaction in early November, this move could prove to be a false break but for now MQG is looking quite strong.
Chart 3: MQG Daily Bar Chart with Price Cluster
click to enlarge
Congratulations to those who took any of these trades. This action provided a good example of how resistance can become support and a lesson in what to look for to select better trades. For your homework, I suggest you have a look at how well this market has reacted to all the resistance levels on the 2009 Ranges Resistance Card. Watch the action over the coming days and weeks to see whether it moves to the next resistance level or falls back below the current support.
It’s The Journey
Lauren Jones
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