It’s been a while since I’ve put pen to paper for the Safety in the Market Monthly Newsletter. This offers me an opportunity to change tack from the more advanced material we cover in the Platinum Newsletter and get back to basics. In this article, I want to share a potentially powerful setup using price forecasting alone.
The Australian share market has plenty of investors keen on the prospect of better times after many months of choppy sideways movement. Some of the stocks on the ASX have taken quite a battering, including QANTAS (QAN), Bluescope Steel (BSL) and Seven West Media (SWM). Depending on your assessment of the underlying fundamental strength of these companies, there could be opportunities afoot.
SWM recently generated interest at an Interactive Trading Workshop after popping up in a scan. With the share price of SWM severely depressed, the ITW group in Brisbane applied some basic price forecasting methods and before long had uncovered some potentially powerful confirmation.
Chart 1 is a big picture view of SWM, taking in the market action following the All-Time-High of April, 2007 ($15.95). The major range from this high to the March, 2009 low ($3.40) gives us a range of $12.55. Taking this range down from the November, 2011 high, we arrive at a 50% Danger Zone (milestone) of $1.67.
Chart 1 – SWM Monthly Bar Chart – Part A
click chart to enlarge
In July this year the SWM share price dipped to $1.40 and you don’t have to be particularly perceptive to work-out that $1.40 is lower than $1.67. Considering the beating this stock has taken over the past 5 years, overshooting a potential target by a small margin is acceptable. This sense of ‘flexibility’ also comes from other sources.
Chart 2 again displays the monthly action but this time we are looking at a bar chart with the latest monthly swing ranges as an overlay.
Chart 2 –SWM Monthly Bar Chart – Part B
click chart to enlarge
The penultimate downside monthly swing shows a range of $7.10 - $2.34 = $4.76.
Calculating our 50% Danger Zone for the next downside we get $3.85 – ($4.76/2) = $1.47.
There is a nice cluster of overlapping 50% Danger Zones here and studies of our Road Map tell us that when a change in trend occurs, it has an 80% probability of occurring at this key 50% target. I have added volume to this chart and this spiked in July, 2012, which should have also spiked our interest level. The daily bar chart reveals that most of the volume for the month occurred on 19 July and was due to an institutional investors offering. No one should mind buying in at around the level where millions of institutional shares were purchased.
Do any of these calculations guarantee a rise in the share price? Of course not. Nothing in the markets can be guaranteed. But we do have a nice cluster of milestones and an extremely interesting spike in volume. It may take some time for a base to form but should the $1.40 level hold for several months, pressure to the upside will be strong.
You’ve gotta love the ABC Pressure Points Tool and the Power of Ranges!
Until next time…
Professional Derivatives Trader