Stay On Your Toes

In last week’s Trading Tutors article I highlighted the fact that the SPI200 had managed to run down an equal range to the last significant pullback seen in this current bull cycle. Coming off the top of 3486, the SPI200 had run down 154 points to the 3332 low. This range was compared with the run down from the October top of 3316 to the November low of 3161.

The sentiment over the past 2 to 3 weeks had become increasingly negative and for the first time in a long while, some seemingly real fear was entering the global equity markets. Those who have been keeping an eye on the news during last week would have heard about the sharp selling across the board in Asian bourses. This would have only contributed to the negative sentiment. At times it pays to be prepared to take a contrarian view, particularly at times when the sentiment of the market seems to have swung too far in one direction. But this is not always easy to judge! That’s why you need to fall back on the technical indications.

The SPI200 over the past couple of weeks revealed a short ABC trade, for which the low on May 11, 3332 was Point B. Considering the perspective of equal ranges on the weekly chart this was a trade to take with some degree of caution, ensuring that at least some profits were locked in once the market had reached the 50% Milestone. Taking a look at Chart 1 you can see how this trade did manage to reach the 50% level (3345), triggering a move of the protective stop to 3355, which is a profitable position.

You can see also in Chart 1, where I have highlighted how I was focussing on the Swings. The One-Day Swing Chart was showing clearly contracting down swings and expanding up swings. A clear hint that the market may have been losing momentum on the downside, rather than gaining momentum, in the light of the negative sentiment.

I traded the ABC Short and closed out half of the position at 3355. Leaving the stops for the other half of the position at the entry + commission. Once I had firmed up my opinion that the swing chart was indicating the potential for a change in trend it was time to consider a more advanced strategy of stopping and reversing the position. Basically this implies exiting the short trade and immediately taking a long position on confirmation of a first higher swing bottom. In Chart 2 we have the bar chart for the corresponding period on the SPI200. I have highlighted the point at which I stopped out of the short position and reversed to go long.

Now this trade is more advanced than the basic ABC Trading rules and is along the lines of the Advanced Swing Trading techniques taught at the Interactive Trading Workshop. You can see here how valuable these more advanced lessons can prove to be. Taking a profit on the short side of the market and then turning around and profiting from the long side. I’d like to believe a few of the traders who attended the recent workshops in Sydney and Melbourne managed to add some more gold to the coffers with this trade.

Until next week......

Noel Campbell