With the current volatility on the market we thought it would be a good time to look at some of the biggest stocks in the Top 100 to see what they are doing. Heavy selling has occurred across the broader market, and with it we have seen the price of stocks like CBA, AMP, BHP, TLS and WOW trade lower to test levels of support below, and in some cases the stocks have triggered signals to exit. Given this, we thought now would be an opportune time to apply some simple techniques and make comment on how the stocks have been unfolding.

Commonwealth Bank Australia

Since falling to a low in January 2009, CBA has risen around 149% in just sixty-four weeks. This rise is faster than any previous uptrend over the same period of time. Whilst it is always important to allow your profits to run, it is equally important to ensure that you are prepared for a change in trend. Remember what goes up fast will generally come back at a much faster rate than the prior rise. Given this, you need to know how you will manage your downside risk when conditions do change.

CBA recently broke through resistance at around $56.00 to be trading just below the All Time High price for the share of $62.16 in November 2007. This is a strong level capable of turning or at least slowing the rise, and as expected, the stock formed a high close to this price at $60.00 on 21 Apr 10. As you can see, CBA has pulled back swiftly from that level to provide two consecutive weekly closes below the current uptrend line, and this week triggered a Gann swing exit. Given this, now is not the time to consider CBA. That said, if you already hold the stock you might consider selling to protect your capital against any further downside risk, in case the stock continues to fall through support at around $51.00 to the next level below at $46.00.

AMP Ltd

AMP has never traded above its opening price, and is one of the worst performers in the ASX Top 20 over the past 10 years. It is therefore not a stock suitable for ‘buy and hold’, however it is a good trading stock that has more than doubled in price a number of times.

During the past six months, whilst other financial stocks continued to rise, AMP has merely traded sideways below resistance at $7.00 causing it to also break below its uptrend line. Prior to the falls we have seen over the past few weeks, this sideways move could just have been a consolidation phase  ( as highlighted by the pennant pattern )  prior to its next upward move. However, as AMP recently broke below the pattern and continued the decline this week to confirm a downtrend is in place, the risk of a further fall has increased. Given this, it is now possible to draw a downtrend line from the high in Oct 09.

AMP has been in a battle against NAB for the opportunity to takeover AXA. As a general rule, the share price of the company doing the taking over is likely to fall, whilst the price of the company being taken over will rise. Therefore, if AMP is successful, the share price is likely to be held back for some time below the current downtrend line. That said, if AMP moves up to complete two consecutive closes above the downtrend line, it may be time to move it back onto your watch list.

BHP Billiton

Following the long term low of $20.00 in November 2008, BHP worked its way up steadily to a recent significant high of $44.93 on 6 April 2010, before reversing and falling away to complete two consecutive weekly closes below the current uptrend line at the end of April. It is interesting to note that until January 2010, BHP enjoyed support from and traded above an uptrend line  ( dashed line )  anchored from November 2008. However, in January BHP reversed from Point A and broke down through the uptrend line to find support at around $40.00 before continuing the uptrend to a new high at Point B. This move to a new high enabled a new uptrend line to be drawn  ( solid line ) .

Historically BHP has resonated around particular levels of support / resistance; multiples of $8.00 being $32.00, $40.00 and $48.00, and also the half way points  between these levels at $44.00 and $36.00. Two weeks ago BHP gapped down at the start of the week to close strongly below the $40.00 level, and is testing support just above the next level at $36.00. Given this, it is likely for BHP to slow the current decline close to this level.

If you were using trend lines to manage your exit then you would be out of the trade. However, if you are using Gann swing or Dow Theory to manage your downside risk you would still be in the trade. Remember to set a stop loss to protect capital in case it continues to fall. If you are looking for an opportunity to take a position in BHP it is important to note that the weekly swing is still pointing down and therefore it has not proven the fall is over. Given this, it would be better to wait until the stock looks stronger technically, particularly as the next level of overhead resistance is not far away at around $40.00.

Telstra

Following the All Time High of $9.20 in February 1999, TLS traded down to a low of $2.88 eleven years later in March 2010. This represents a loss in value of 69%, making it similar to AMP as one of the worst Top 20 stocks to buy and hold. However unlike AMP Telstra is not a trading stock. Although TLS has paid a huge dividend, this massive erosion of capital adds little support for the ‘buy and hold’ approach advocated by many advisors.

Marked on the monthly chart below are important price levels which have been calculated by taking specific Fibonacci and Gann percentage levels off Telstra’s $9.20 high. You can see that so far the price action has respected the levels at 38.2%, 50% and 61.8%, with these price divisions being support / resistance.

In terms of where to from here for TLS, there is no indication so far that the long term decline is complete. Currently TLS is trading under a confirmed downtrend line on the monthly chart as shown. For me the stock would need to move up convincingly through this line to even indicate possible future support around $2.90. Given this, TLS is more likely to fall to around $2.30  ( 75% price division )  before it is ready to turn up in a sustainable manner and be considered for purchase.

Woolworths  ( WOW )

Following the All Time High  ( ATH )  of $35.05 in December 2007, WOW fell away sharply as investors exited over the next seven months to create a significant low of $22.85 in July 2008  ( Point A ) . Important levels of support / resistance are shown at $24.20, $26.60 and $29.20, indicating it has a natural price multiple around $2.50.

It is also interesting to note that while in the grip of the GFC, the significant low at Point A occurred about nine months before most of the market bottomed in March 2009. Since then WOW has been caught up in a sideways trading band between $24.20 and $29.20, and in doing so has given investors a moderately volatile journey, with fluctuations ranging between + / – 9.5%. Going forward, $29.20 is a very important resistance level and as such, until the stock breaks strongly above this level and out of the sideways move, I believe there are better opportunities elsewhere.

More articles by this author

To Hold onto Profit: Get into Corporate Actions07 February 2012

Trading the market or managing your very own share portfolio...

Read More >>

Best Big Australian Share Market Floats07 February 2012

It is common for companies to list on the Australian...

Read More >>