Tim Walker
Tim Walker

The key to finding good trading opportunities is to identify when a market is positioned for a big move. Some of the powerful tools that can assist you with this are covered in the Number One Trading Plan, in the chapter entitled Price Forecasting.

At the recent Trading Tactics seminar in Perth, we examined two trades on stocks in the S&P 100 (the index of the 100 largest companies in the United States). These were AT & T Corporation (T:NYSE) and Occidental Petroleum (OXY:NYSE). Both of these were showing ABC short trades at the time of the seminar but what interested me more was their position in the ‘bigger picture’.

As the term suggests, looking at the bigger picture means studying the weekly (or even the monthly) charts. We want to see major signals, which I would summarise as follows:

  • Double or triple tops or bottoms;
  • Repeats of previous major ranges – either 50%, 100%, 150% or 200%;
  • Bear markets finding support on 50%, 62.5% or 66.7% on a Highs Resistance Card;
  • Bull markets striking 50% or 100% multiples of Lows Resistance Cards;
  • Moves finding support or resistance at 50% of the most recent major range; and
  • Markets breaking above highs or below lows which have held for many years.

While this list may not catch every major move in every market, it will catch most of the big moves and will provide endless opportunities for profitable trading. Obviously you would like to see major Time harmony as well but for the purpose of this article we are going to concentrate on an analysis of Price.

Both T and OXY have exhibited some of the characteristics listed above. Chart 1 below displays the last few years on a monthly chart for AT & T Corporation. From the high in September, 2007 (which was not the All-Time-High), the market fell 50%. The October, 2008 low just overshot the 50% milestone of the Highs Resistance Card before reversing.

Since then the market has rallied and in 2011 and 2012 it made a double top, right on the 50% milestone of that bear market range. As it happens, that was not much above the 150% mark of a Lows Resistance Card from the 2008 low.

A subtle point worth noting is that the second top, which occurred in March this year, went three cents higher than the 2011 high. This is an additional sign of weakness, since any buy stops above the old high would have been hit. The instant reversal indicates that there were sellers ready to absorb those buy orders and send the market lower.

Chart 1 – AT & T Corp Monthly Chart

click chart to enlarge

Once you have identified this set up, your analysis is complete. Now you go to your Trading Plan and apply your trading rules. You put your rules to work and ‘sit back and relax’. This does not mean going short and gone away for a holiday! It means that you stop thinking about whether to trade or not. You follow your rules mechanically and take trades that meet your criteria. If you have a sound plan, the market should take care of the rest.

The next market - Occidental Petroleum – presents a different kind of set up. This one is based on Repeating Ranges rather than Resistance Cards and might be called a ‘Tale of Two Fifty Per Cents’. Let’s look at the monthly chart:

Chart 2 – OXY Monthly Chart

click chart to enlarge

This one is pretty obvious. The rally out of the October, 2011 low failed at 50% of the range of the bull market from October, 2008 to May, 2011. Now to the weekly chart:

Chart 3 – OXY Weekly Chart

click chart to enlarge

Zooming in on the run out of the 4 October, 2011 low, the smaller time frame of the weekly chart also shows a failure at 50% of the first range of the rally, from 4 October to 8 November.

And just to complete the picture, the daily chart reveals that the last ABC Long trade into the 28 February top also failed at the 50% milestone. It is always worth watching the milestones on individual ABC trades, even after the trade has been completed. The 50%, 100%, 150% and 200% milestones often coincide with subsequent turns.

Chart 4 – OXY Daily Chart

click chart to enlarge

How you profit from these set ups will depend on your own trading style and rules. Both these stocks presented opportunities and difficulties. When you understand that there comes a time when you take off your analyst’s hat and put on your trader’s hat and focus on your Trading Plan, you will take a giant step forward.

Knowledge is Power!

Tim Walker