Noel Campbell
Noel Campbell

Welcome to this edition of the Safety in the Market Monthly Newsletter. This month I wanted to share with our traders some of the work we have been doing at our recent Interactive Trading Workshops (ITWs) on the stock Orica (ORI). I believe the ITW is virtually our best ‘trading’ seminar. This is where our traders learn how to begin analysis of a stock on the bigger picture and hence, determine a more medium to long term point of view on where a stock is going to go next.

Chart 1 is the weekly bar chart for ORI showing the entire history of the stock price movements since 1990.  ORI made a major low in January 1991 at $3.06 and from here ran up to a high in January 1997 ($13.56), giving us a major range of $10.79 ($13.85 - $3.06) to use in the future.

After the January 1991 high, ORI was clearly out of favor with the market and retraced to make a major low in June 2001 at $3.95. I struggle to call this a double bottom in terms of how close the January 1991 and June 2001 are in price. But the time between them being so great (10 years +) allows for a lot more price leeway to be applied.  Either way the 200% rule works for ranges and not just Double Tops and Bottoms.  Let us call this pattern a Double Bottom this time around.

Taking 200% of the $10.79 range (Jan 91 – Jan 97) and adding this to the low in June 2001 ($3.95) we get a price target of $25.53 as major price resistance and a clear big picture sell point.  ORI was moving rapidly and through ‘lost motion’ failed to stop right on the pressure point and topped at $26.45 in May this year.  It is not precise (which provides the best seminar examples) but close enough for me to know its time to ring the alarm bells and look out for a short opportunity.

Chart 1 – Orica Weekly Bar Chart (ORI) – Major Double Bottom (Ranges)

chart1
click chart for more detail

Chart 2 is the more recent market action for ORI on the weekly bar chart.  You can see where I have indicated the ‘Overbalance in Price’ on the weekly swing chart off the $26.45 top and the weekly Point C (short) that followed.  This trade was one of the hand picked trades at the recent Melbourne and Brisbane ITWs.

Chart 2 – Orica Weekly Bar Chart – Recent ABC Short

chart2
click chart for more detail

Referring back to Chart 1 for a moment, study the action closely as the market ran up into the May 2006 top. You can see where price action paused around the 150% Pressure Point (PP), retraced at the 100% Pressure Point (PP) and then advanced to the top at 200%. These Pressure Points from the major double bottom are proven servants and should be watched closely for support as the retracement continues. Watch very closely for strong support around the 100% PP, which is near the January 1997 top and the 2005 spike low, however there are plenty of milestones to deal with before then, the 150% being first.

This example on ORI goes to show the importance of knowing the history of your stock and watching the bigger picture when looking for your trades.  It was over 15 years of history on ORI that led to us giving out the weekly short trade at the ITW, clearly no fluke and nor should your trading results.

Until next time…

Noel Campbell