Thursday, 20 December 2018

TRADE OF THE WEEK # 1 - V.S. INDUSTRY BHD

Note : This is our first installment of the 'Trade of the Week' series, where we showcase an interesting recent trade to highlight winning strategies in a basic, short form format. Not all trades deserve a long form writing treatment; some readers may also prefer a quick read over lunchtime (the same time it took us to write this post). 

There will be no external links in these posts; we also hope you can read candlestick charts to get a better sense of our market timing.  






Why VS? Basically it's due to the fact that the stock has been under immense pressure lately. Its recent earnings report suggest future weakness in terms of overall growth. The company itself warned investors about this, swiftly followed by downgrades by the research houses.

Why growth weakness? It's due to the company highlighting that a 'key customer' is expected to place lower orders in the coming quarters. We suspect that this is Dyson, the UK appliances company and a huge source of contracts for VS (and its smaller peer, SKP Resources) in recent years. VS's stock was on a high earlier this year, but has since plummeted from RM2.40 to below 70 sen.

It got a lot worse on 17 December as VS hit its limit down price immediately following the earnings disclosure. The stock stopped trading at 82 sen on that day.

THE TRADE 

5-minute charts for VS, from 18 December to 11AM on 19 December (our trading period)


18 December, 2018

This was when it got our attention. We immediately sensed an opportunity to make good contra trading profits. But to go into this stock required a calculated approach, and the entry point must be well timed. Otherwise the volatility will cause our position to swing into a loss.

We contemplated a few possibilities on how the stock would trade the next day after it hit limit down. Obviously the stock is expected to trade lower than 82 sen, but how low?

We would have been quite excited to pick up the shares if it got close to the next day's limit down threshold, which is 52 sen. At 8:59AM on 18 December, it looked like it was going to open at 66 sen - 16 sen below the previous day's price.

We decided against going into the trade immediately at the opening, as we were concerned that the stock could go lower. But VS showed serious buying strength and immediately hit the 70 sen mark, or a 6% increase from the open.

Our first move is to go into the stock at 70.5 sen, as buyers cleared the 70 sen selling queue easily (thousands of lots). We anticipated a rally to 75-78 sen, a best case scenario and a good exit point for us to make significant profits.

However, 70 sen is typically expected to be the resistance point. The risk is that the trading could just stay there for the rest of the day. After VS hit 72 sen, the momentum shifted. Now there was a lot of selling pressure concentrated at the 69.5-70.5 sen mark.

Sensing this, we exited our position at 69.5 sen by 10:30AM for a small loss - by this point we understood that it is more likely that the stock will decline as opposed to going up. We put a time limit on this trade to work; when it was reached, it was clear that the stock will not move up quickly.

We stayed on the sidelines to watch the stock; our original theory was already disproved. VS weakened steadily thereafter and hit a new intraday low of 63 sen at 3:50PM; as you can see, we saved ourselves from a further 9% loss (and a lot of grief). The stock closed at 65.5 sen on that day.

19 December, 2018

The key to trading is finding the right windows of opportunity to trade. If there isn't one, just don't go in. Sounds simple enough, but it's easier said than done - speaking from experience, we know that people have a tendency of seeing signals that simply aren't there. Some people trade for the sake of trading, or worse, for the 'fun' of it.

We consciously try to avoid such bad behaviour. We were wrong yesterday, so we reassessed the potential outcomes. It was plausible that VS could continue to fall further or stage a rally; this is obvious, so we had to refine our thinking to formulate a scenario where we can reasonably go in.

It's a bit like a computer program command: execute if, and only if. To simplify our next approach for trading VS (yes, we still saw trading opportunities here despite the previous day's activity), here's a distilled version of our analysis:

1) If VS opens below 65.5 sen : don't trade.
2) If VS opens at 65.5 sen : don't trade.

Both 1 & 2 are signs of weakness, not momentum. But if there was upwards momentum, we expect to see volatility quickly. In this trading scenario (volatility trading), this is what really mattered.

But there's also Scenario 3:

3) If VS opens much higher than 65.5 sen : put on a moderate size trade.

We were hoping for Scenario 3 because of this : On 18 December, a lot of investors would have attempted to buy VS at the lows. Because the stock didn't move, they may also have thrown in the towel (like us), and some may have been forced to sell at the lowest prices (not us).

But if the stock rallies immediately on 19 December, it is highly suggestive of real buying interest. In numerical terms, we could capture a profit opportunity at any point between 65.5 sen and 72 sen (yesterday's intraday high). And if the buying interest is sustained beyond 70sen, there's a chance of the stock breaching the 72 sen mark; this would be a bonus for us.

With this in mind, we waited to see how the market would open. Basically Scenario 3 unfolded, and having noticed that quickly, we put on a position at 68.5 sen (our order was keyed in at 9:01AM). The stock rallied further as we expected, quickly hitting yesterday's 70 sen resistance point.

At this juncture, we could have got out with a 1.5 sen per share gain. That would be a reasonable thing to do. But we sensed further upside for the stock based on our observation of the buy and sell activity.

We were committed to two zero-sum outcome possibilities.

1) Exiting at 68.5 sen (our entry point) if the stock weakens. Basically break even, but a small loss due to the brokerage fees.

2) Wait and see if the stock can test the 72 sen mark.

Basically, we were willing to give up 1.5 sen in gains for the chance to achieve a 3.5 sen per share gain. Our thinking was clear; there was literally a price for the consequences of our actions.

Again, the time stop is important. To avoid the recurrence of yesterday's trading activity, where the stock lost momentum at the 70 sen mark, we decided to set a two-hour limit to our angle. If VS doesn't rally further by that time, we would happily exit.

Fortunately we didn't have to wait long. By 9:55AM the stock hit the 70.5 sen mark on heavy buying volume. Our best case scenario expectation was unfolding.

By 10:30AM, the stock hit a high of 74 sen. Anywhere above 72 sen is a bonus for us, of course. We got out at 73.5 sen, a point which we thought was the highlight of the buying frenzy. To us, it was likelier that the stock will not continue its rally. We were also close to our mandatory 10% profits per trade target, so getting out was the sensible option.








So good returns all around. Nothing better than a well executed trade, and profits that came as a direct result of proper planning.

Outcome

Gross profit : RM2,500
Return on Investment (ROI) : 7.3%
Duration : Intraday, 1.5 hours








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