Tim Walker
Tim Walker

In last month’s article, I considered the position of two stocks – AT&T Corporation (T:NYSE) and Occidental Petroleum (OXY:NYSE), which showed clearly identifiable price formations to tweak the interest of traders. Both stocks have made interesting moves since then, which are instructive to analyse.

Chart 1 – AT&T Double Top

click chart to enlarge

On 21 March this stock made a double top, as discussed last month. The earlier top is marked with a horizontal line. Although this bar was a key reversal signal day, it still closed above the previous day’s high and the safer entry would be to wait for the first lower swing top trade, which duly arrived a few days later.

The next ABC trade, which is not shown on Chart 1, presented some difficulties. There were two days from A to B, and then four from B to C. What’s more, volume picked up a bit on the last day of the rally. In any case, you were spared from making a decision as the market had a large gap down the next day and opened at the 50% milestone, well outside the limit.

This illustrates the advantage of not only trading the first lower swing top, but also of using a multiple position strategy such as the ‘3 Contracts System’ taught at the Interactive Trading Workshop. If you were trailing part of your position behind swing tops, you would have benefited from this fall.

After the low on 10 April there was another ABC short trade but this failed to move far, instead making a higher swing bottom and stopping you out. At this point you would sit aside and wait to see what the market did next.

Chart 2 – AT&T Triple Top

click chart to enlarge

After consolidating during the middle part of April, company earnings were released on the 24th. This produced a massive up bar on very strong volume, erasing all the falls since the 21 March top.

The next day - 25 April - produced another key reversal signal day, although it again failed to close below the previous day’s close. But volume was good and the high of that day was three cents above the 21 March high – a good reversal signal.

We discussed this set up in the Advanced Trader Coaching session that evening. On the one hand you have a triple top, while on the other a very bullish up move supported by volume. So what do you do?

The answer, perhaps surprisingly, is very simple. If your Trading Plan says that you trade triple tops with signal days, you simply place the order to go short. If you are uncertain you can simply take a smaller position, but the important thing is to follow your plan. Your stop loss order will protect you if you are wrong. You should also consider placing an order to go long if the market breaks above the triple top by, say, ten cents.

Chart 3 – AT&T Breakout

click chart to enlarge

Chart 3 shows that the short entry was never triggered. The next day produced another strong up move on large volume and you would be in the market long. But where would you place your stop? The last swing bottom is a long way away, so one option would to place your stop under the low of the previous day (the one that had formed the triple top).

This again highlights the advantage of the ‘3 Contract System’. Taking some profits at the close of the third day of the trade would have eliminated your initial risk and left you quite comfortable holding on for the next move. Remember that the double top had been on 50% of a major range, so breaking it required a lot of strength in the market and a good up move could be expected.

Again, you have to make a decision at the next ABC long trade. The AB range was very large and therefore unlikely to repeat. One option here would be to use the ‘Stock Index stop strategy’. The theory is that if the AB range is abnormally large, the trade might fail at 50%. But there is still room to make good profit by then. This can be useful in a situation like this, where there are factors for and against the trade. This also helps build up your discipline as you keep taking the trades dictated by your Trading Plan.

As you can see, the latest bar (11 May) did hit the 50% milestone and a position using Index stops would have been stopped out. But if you were also trailing swing bottoms with part of your position, that would still be open and you would continue to follow the market moves.

Now let’s take a look at Occidental Petroleum, which presents an entirely different picture, and lesson.

Chart 4 – OXY Double Bottom

click chart to enlarge

At the same time that AT&T was looking like a triple top, OXY made a double bottom, sitting on the 50% retracement level of the range from the 4 October low to the 28 February top. This was a very significant range, as you can see from a weekly chart. We discussed this in last month’s article too. Also shown is a 1 x 1 calendar day angle from the low, which caught the bottom of 23 April exactly.

Chart 5 – Rally and Failure

click chart to enlarge

The market made an outside reversal week that week, and you could have gone long on the break of the high of the previous weekly bar. In any case, an ABC long trade was signalled on 30 April. The next day it rallied strongly, and while it is not clear from the chart, OXY failed by eight cents to reach the 50% milestone.

Some argue that you should not move stops until the 50% level is actually hit. However, my view is that safety of capital is paramount. The Road Map Chart labels 50% as the ‘Danger Zone’, where most unsuccessful trades come to grief. A failure by a whisker to reach this level is, to me, a sign of weakness in the trade and I would happily move my stops to cover the entry. Note also that the market sold off into the close and even though it was not a low close, it did indicate that there was some profit-taking at the end of the day.

The next day was a small down day and the day after produced an outside continuation day, which stopped out the trade and indicated that OXY was in trouble. The rally from 23 April to 1 May also fell just short of the 37.5% retracement level of the larger range from 28 February to 23 April.

On 8 May the double bottom gave way. This would appear to indicate that the bigger picture bearish view (that was covered in last month’s newsletter) is still in force. Again, you could have gone short that day on a break of the 23 April low by 10 cents. You would have been nervous, with the market making a key reversal day, closing near its high and above the open. Volume was strong. This could be a false break and you would move your stop loss order down above the high of the day.

However, the market went no higher and fell on even stronger volume the next day (9 May). On the 10th an ABC short trade was signalled, with Point C failing to rally as far as the old double bottom/50% resistance level. This trade was filled the next day and you would currently be short in this stock.

My message in studying both of these markets is that, regardless of the set ups you identify on the chart, trading is a day-to-day activity of monitoring the market moves. A good Trading Plan with sound rules, combined with good form reading skills, will help you to navigate the maze. Become familiar with all of the trading strategies in the Number One Trading Plan and stick with a market once you find a good set up. Your hard work and dedication will pay dividends.

Knowledge is Power!

Tim Walker