Tim Walker
Tim Walker

It’s hard to imagine QBE as a glamour stock, yet its ongoing woes in 2012 have been a goldmine for Gann traders. QBE came to my attention in January when one of the students in my Advanced Trader Coaching group asked about it. QBE and bad news have been synonymous in 2012 and 12 January was just the first instalment.

Chart 1 – Gaps on Bad News in 2012

click chart to enlarge

The three gaps marked on Chart 1 above all coincided with the release of negative announcements regarding the company’s financial position. But the responses of the market in each instance were different. This is because you must take into account the technical position.

The January announcement caused a panic as investors ran for the exit. While the box on the chart measures the gap from the previous day’s low to the high of the gap day, the real gap was much worse, as indicated by the position of the Open that day. The distance from the Open to the low of the day was covered in the first few minutes of trading, after which the market rallied on huge volume for the rest of the session.

What did this indicate? First, consider Chart 2 below:

Chart 2 – Weekly Chart of QBE

click chart to enlarge

The market has been in a long down-trend since its All-Time-High of 35.49 in September, 2007. When a market has been down for a long time, its final move down will often be a panic on bad news when investors who had been holding out for years finally become disgusted and sell out.

The two critical factors for QBE here were that it had been down for over four-years and on the day of the low (12 January, 2012), the market closed near its high. This showed that all the selling was met by professional buying. Note also from Chart 2 that the low came in at 50% of the previous high in April, 2011.

If you were an aggressive trader, you might have bought on 12 January as the market rallied back above the Open at 10.25 and you would have been very happy with your decisive action. But even if you had done nothing more than trade ABCs on QBE in 2012, you would have done well. Consider the following statistics:

  • Nine long trades, six short trades (ignoring the ABC short on 17 January – if you took that trade, don’t come crying to me!)
  • Seven out of the nine long trades made money
  • Four out of the six short trades broke even or made money

And you will have noticed from Chart 1 that there were double tops on 4 April and 8 August. There was a lot of time and price harmony around these tops and if you had gone short on the break of the low of 8 August, you would have caught the next bad news announcement on the 16th.

These announcements are usually made after the market closes, so you cannot respond to them until the next day. On 17 August the pattern looked remarkably similar to 12 January. If you had been short, you should have taken part or all of your profits on the Open and then watched to see what happened next.

Again, the market fell after the Open but this time it found support - with a little lost motion - at the 50% retracement line of the year’s range. It also held above the previous low on 4 June. So again you could have gone long on the rally past the Open. But bear in mind that such action looks easy in hindsight with end-of-day bars. Trading in real time is nothing like this – it requires split-second action.

Let’s now turn to this week’s announcement of yet another earnings downgrade. The picture here is quite different, if you study it carefully. There was an ABC short trade leading into this date and the Open on 12 November hit the 100% profit target of the trade. But this time there was no quick fall and rally. Not only did the price gap past the 50% retracement line, it also broke every low this year except for the extreme low in January.

Today’s price action (Tuesday, 13 November) has confirmed this. Although the bar you see in Chart 1 is not complete as I write this article, it shows a gap down from yesterday’s Close, which is unlikely to be filled, leaving the temperature for the day at -5.

The critical point will be to watch for any support and buying over the next few days. At this stage, the price appears set to drift lower but if it can hold above the 12 January low, it might see some strength. It is also quite possible that the January low will be broken. If you consider Chart 2 for a moment, the weekly chart shows that the rallies earlier this year failed to break above previous highs. Thus we still have a market that is making lower lows and lower highs and whose trend could be down for some time yet.

Knowledge is Power!

Tim Walker