Tim Walker
Tim Walker

Wouldn’t it have been great to have been short Silver this past week? Let’s look at a chart and see whether ABC trading could have kept us on the right side of the market.

Chart 1 – Silver Running Into the Top

click chart to enlarge

There are a number of interesting points contained in this chart. Here we have the ABC trade that led into the high on 25 April. What do you notice here? After Point C there was an inside day and then 7 consecutive up days into the top day. In Chapter 2 of the Commodities Course, Gann says that a big run in a market will often end with a run of 7 to 10 days without a down day.

Next we notice that the trade reached the 200% milestone. Quite apart from your obvious enthusiasm if you were in the trade, since with the Index Stop Strategy you could have taken the entire move, you will generally get a trend change, at least temporarily, at this point.

What was Volume doing on this last move? It was going through the roof, culminating on the day of the top. Again, this is what commonly happens. Everyone wants to get in the market just when the top is coming. It’s not that people are stupid; it’s just that this is when the psychological pressure is greatest. Think of your own trading. How often, when a trade is moving against you, do you get most pessimistic just before it turns around and starts going your way? If you give into the emotion instead of following your Trading Plan, this is where you give up and bail out of the trade, usually a point or two before the turn. This is why a plan is so important.

But we’re not finished with the chart yet. Note that the low at the start of the last move up was 28 January and the top was 25 April. This is a few days short of 90 days or 90 degrees, but Gann says that you should watch around this time frame for a change in trend.

Finally, look at the bar on 25 April. It was a huge range, making a new high and closing below the open and in the lower half of the bar.

Now, what does all this mean for your trading? Initially, nothing. In a runaway bull market you have to wait for a definite signal before going short, unless you want one of those short and exciting trading careers. But ask yourself, would you be a bit hesitant to take the next ABC long trade, which was signalled the next day?

Chart 2 – The Next ABC Long Trade

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This is the same chart with one day added. I have also placed a Swing Overlay on the chart. You would now work through the Trade Checklist you studied at the Interactive Trading Workshop. The A to B range is certainly expanding, but remember in Chart 1 we worked out that it was 200% of the previous range. In other words, this is what we would call an abnormally large range which is unlikely to repeat.

See also that the B to C range is expanding compared to the previous swing, and that the volume, while less than the record volume of the top day, was still the second highest over the period. You would be safer to avoid this trade. This is not to say that it mightn’t go on and make money, but it is a risky trade.

Chart 3 – Failure at 50%

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At first you might think you had made the wrong decision. On the 27th the market powered up, filling the trade and with volume almost as high as the preceding 2 days. But look what then happened. On the 28th prices just failed to reach the 50% milestone, and volume fell right back. In the Swiss Franc lesson in the Master Forecasting Course, David talks about the significance of a market just failing to reach the 50% milestone of an ABC trade. Here, when looked at together with the volume, it was definitely a danger signal.

On Friday there was an inside day which closed lower. The temperature over the last 3 days was +4, +4, -4. This is where you can use the Thermometer indicator on days other than Point C to give an indication that the trend might be changing.

Was there a trade signal here to go short? Obviously there was no ABC short trade, as no swing bottom had been broken yet. But in your Number One Trading Plan David gives an entry signal called the First Lower Top. A down day the next day would confirm a first lower top and give a legitimate short entry. However, to take this you would want to do some more work on the bigger picture to look at price and time reasons for the 25 April being a top.

The rest, as they say is history, with the Silver market collapsing over the next week. A fairly feeble rally followed, giving an Outside Reversal Day entry signal last night, which is another Number One Trading Plan strategy.

Chart 4 – The Collapse

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Whether or not you would have taken these trades is not really the point of this article. What is important to see is that - while people will give you all sorts of reasons why the market fell last week, such as margin requirements being increased more than once in seven days - the analysis David teaches in the Smarter Starter Pack, Number One Trading Plan and the trade checklist that is taught at the ITW, followed this explosive period of market action correctly.

Knowledge is Power!

Tim Walker