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Aaron Lynch This week's Trading Tutors article is penned from my desk a little further afield than usual, in Singapore. BHP has been one of the best performing shares on our exchange and has been plum pickings for those who have traded the trend and held in for the move. Buying in on the dips over the last 12 months would have ensured some strong profit. Dare I say a buy and hold approach would also have proven successful, in saying that it is a lot harder than it seems when trading leveraged tools and hindsight can be a wonderful tool.
Back to the current market, there has been a strong sell off in recent days after BHP travelled somewhat sideways through most of March. This leads me back to the studies of Gann and David, and knowing that the market has already given us the information to project where it is going to go. Many new to Gann's work ask me how mathematically complicated his analysis can get. Well quite simply, while there are a lot of numbers to take in, the maths itself is not that hard. One of our new students in Singapore asked me that same question; would he be talented enough to handle the numbers challenge? I asked him his background, he has a mathematics based degree and is a chemical engineer by profession - I think he can handle it! It just goes to show how easy it can be to underestimate your abilities.
The Number One Trading Plan teaches us to ask questions on where a market may go. A Lows resistance card on BHP would have you looking for a top in the area of the current market action at $19.50 based on the all time low of $0.52. The weekly chart below has horizontal lines marked at $0.52 intervals, the price of $19.24 and $18.72 have proved to be significant levels of support and resistance. We have yet to see the market manage to close above the $19.24 mark. It is around this price that the market has started to pull back from.
Chart 1
click chart for more detail The power of basic numbers is also important when looking at ranges repeating across time frames. One of my favourite ranges to look at is the first range out of a major top or bottom. This can guide us to the moves the trend will make. On many occasions market moves including tops and bottoms are in proportion to the first range out.
The chart below shows the range that we are using from the July low of 2003. Looking for the first pullback in time and price we see a high in September 2003. This range in price is $3.17.
Chart 2
click chart for more detail The final chart below uses the $3.17 price and adds multiples of this number to give us price points for support and resistance. The orange lines are multiples of 100% and the blue lines all represent intervals of 25%. Three and half times the first range out gives us a target of $19.41. Using our two different “number” based techniques we start to form a cluster in price.
Chart 3
click chart for more detail The next question is to ask how we would have traded this bearish move, more on that another time. For those who want to do some analysis, a short trade was possible if you knew your advanced swing rules, the first lower top was tradeable if you had ignored the swing from the outside day.
Good Trading
Aaron Lynch
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