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Monday, 22 April 2019

TRADE OF THE WEEK #11 : SEDANIA INNOVATOR BHD


There is not much technical explanation on this particular trade - if we were to sum it up, it's purely instinctual. But you have to understand several key things about how the market works. As just about everyone else when they began learning about the stock market, we started from a position of complete naivety and worked our way up.

We were the suckers who bought at the market peak - 30 sen. As we got better, we were the ones who bought at slightly lower prices - let's say 27 sen. The more experienced you are, and the more you understand the behaviour of stocks, you should end up buying at lower and lower points. This was pretty much the case with SEDANIA. 

A little bit of background : there was no background, really. Just some vague news and after-the-fact rationalisations about why Sedania's stock suddenly exploded on 12 April. Until now, we still had no clue why the stock went swiftly up and swiftly lost all of the one-day gains. It seemed to be a random market mania, driven by low liquidity.

 The mania.

We were fortunate to have discovered this rally quickly. There were low sell volumes throughout its ascent from 17.5 sen to 30 sen, and we got in at the 20-21.5 sen range. This is what is known as a natural support point - anything higher than 22 sen and we'd probably be too frightened to jump in.

Despite not having the fundamental backing or any news to support this rally, we understood the stock's behaviour. Having analysed the buy and sell activity - again, nothing to do with fundamental analysis or conventional technical charting principles - we deduced that there was a good likelihood of the stock hitting higher price points. 

Being conservative, we anticipated that the stock would hit 25 sen per share, meaning a return of more than 10% for us within one day. Remember that a rise from 17.5 to 25 sen already constitutes a massive 42% gain; if anything, we were being extra imaginative, and extra cautious.

This little phase of trade analysis and execution happened very, very quickly quickly; the ability to synthesise different sources of information into a trading strategy is a real money-making skill, and we were confident that the rally opportunity is there.

How quickly? We decided on trading the stock within a minute. Then we got in and out of the stock in two minutes. The whole move honestly frightened us - the stock was going nuts, like, really nuts.

To give you an appreciation of how nutty it was - we made an 18% profit in those two minutes by exiting at 24.5 sen. The stock actually went even higher to a shocking 31 sen. We left a lot of profits on the table, as is the case for many of our most successful trades.

But our execution was solid and our profit targets were met; in the long run that's really all that matters. But the lack of liquidity in SEDANIA was such that the stock propelled itself to a one-day gain of 77% - nice work if you can trade like a hero. 

More importantly, we were no longer the latecomers that bought in at 30-31 sen. There were massive volumes changing hands at those levels, and we were sorely tempted to jump back in (it's embedded in the human gene) but chose not to. Most people tend to forget that lack of liquidity is a two-way street; if the stock swiftly goes up, it can go back down harder, and likely faster. Manias are called that for a reason; they don't tend to last long.

Since that day, the stock has practically given up all its gains. This we expected; after that one-day angle, any subsequent attempts to trade tends to be a losing proposition. We were grateful for the profits and moved on. 




Outcome
Gross Profits : RM2,250
Return on Investment (ROI) : 18%
Duration : Intraday (2 minutes)






Monday, 15 April 2019

TRADE OF THE WEEK #10 : FRONTKEN CORP BHD


Generally, we divide our trading strategy into two distinct situations. If you've been following this blog, you've probably heard us ramble on and on about the concept of artificial mispricing. There's a good reason for that - it works.

But this time let's throw that out of the window for a second key tactic. Some may call it market timing, but we have an even worse name for it : momentum catch up, under the right circumstances.

OK, we'll call it market timing. But can you set rules to do this to at least trade responsibly? We think it's possible, and we did.

The main problem with timing is that most people apply it to any situation. The stock suddenly hitting the highest point of the day? Jump in. The stock falls to a one-month low? Feel free to take the plunge. Many of us confidently buy into the stock when it hits an all time high with brute force: buy as much as possible and if the stock retreats, buy even more. There's no surprise that people who keep doing this will eventually blow up.

Here's how we do it. We came up with a some important parameters - we have always said that filters are super important. Buy slowly and let prices inch up. A fast move in a stock is great but it doesn't guarantee longevity. This is especially important when the stock hits an all time high. You need concrete reasons to buy into the stock and grow the position if it goes your way.

THE TRADE

Here's what we like to do when we see a stock hitting a new high.

1) Find a good entry point. In technical terms, we prefer to have a small position as the stock attempts a 'second wave', or another attempt to break a new high. For FRONTKN, the chart made this very clear.

Green candle, 3rd from right. That's an attempt to break the previous high (leftmost candle).

This pattern is especially interesting due to the price point: the stock is hovering around the RM1 mark. Since 11 March, it had undergone weeks of consolidation. It just hovered there and provided us with our favorite conviction signal: if it wanted to collapse, the stock would have done so already.

Instead, on 28 March the stock began its ascent on heavy buying volume. On the 29th, it easily broke the RM1 mark and hit a high of RM1.03 before retreating (green candle above, third from right). We had anticipated this as it is generally seen as a resistance point. Our preferred entry is somewhere near the RM1 mark after the stock had attempted to breach RM1.03 and failed. This is very important if you intend to profit from the really small price spreads.

2) Buy slowly and let the stock work itself out. We accumulated a position in anticipation of a breakout - or the stock resuming its ascent. Again, we set our limits within the rectangle below. If the stock doesn't move up, we would exit and incur a small-but-worth-trying loss. If we're right, we'd be looking at some handsome profits.



3) Set the thresholds. To simplify:

   i) Loss limit : 98-98.5 sen

   ii) Time limit : Contra period (for the position to show a profit, or T+3/T+4 - within 3/4 days).

  iii) Buy smaller positions as the stock inch upwards (although we dislike the term, it's generally         known as pyramiding).

  iv) Signal to buy more of the stock - as soon as it swiftly breaks the RM1.03-RM1.05 range.

   v) Profit target : 10% of capital invested.

The rectangle, an important visual representation of the trade, gave us the clarity needed to think properly. When stocks are volatile, you may be tempted to follow your gut and try to be a hero; you hardly think of the downside. We try to never do that.

4) If the stock goes up as expected, manage the profits. Early on, we decided to cap our minimum profits at RM1.07 if it ever hits that point. That means our returns would be a respectable 5% from our initial entry point.

What eventually happened was that during that three-day period, we accumulated around 20,000 shares at RM1.01. Indeed, for the two days (the ones with the red candle) the stock looked like it was going nowhere fast.

We were dealing with minor paper losses as prices got stuck at the 99.5 sen range. But notice that in that three-day period, the stock recorded 'lower lows' (in each day, its intraday low was lower. Always pay attention to this kind of movement, not the colour of the chart).

On the third day, we had liftoff.


Because of the strength of the buying since the stock broke out, we were confident enough to stay in. the stock's volatility profile was not too bad; notice that from 3 April to 5 April, it didn't even go into the red (a lower price point than the previous day's close). Sustained demand brought this stock upwards and quickly, somewhat exceeding our initial expectations.

Because of the strength of this movement, we bought some more shares on the way up. Our thesis had been validated; we had 100% conviction to load up the position.

We sold a total of 31,000 shares on the fourth day at RM1.12, or just in time for T+4. About a third of the position needed to be sold because of the T+4 deadline, but we exited completely anyway. The profit target was close enough to merit a disposal.

This was a minor size for us, but the profits were really good relative to the position.




Outcome
Gross Profits : RM2,740
Return on Investment (ROI) : 8.65%
Duration : Contra (4 Days)










Monday, 8 April 2019

TRADE OF THE WEEK #9 : DAYANG ENTERPRISE HOLDINGS BHD


This trade is not about following the herd. But the company was intensely followed by the herd recently - we have made our feelings known about this.

These profits are modest compared to the real cavalier speculators, but bear with us as this approach actually required some strategic thinking. It's something you can use the next time you encounter a similar situation.

You probably know the situation with DAYANG. Great recent profits, massive earnings per share growth, recovery story etc etc. It was evidently a leading oil and gas proxy in recent months, with the stock jumping from 80 sen to RM1.70. Had you blindly followed the advice of other bloggers, you most likely have made a lot more money than us.

But if you had come in late, you'd be left holding the bag. That's the inherent danger of trying to ride the speculative wave. Our trading strategy employed none of that. Instead, we simply utilised market timing after identifying a situation that maximised our chances of profits. 

That situation is called artificial mispricing. It can happen as a result of a suddenly volatile market or a suddenly volatile stock. To simplify, the stars aligned in such a way that we know DAYANG can be traded with minimum downside and great profit potential.

The best part? We got in an out in about three hours' time for a four-figure profit from this modest trade.


THE TRADE

On Monday, 25 March, the markets were roiled by volatility as concerns over a US recession reemerged. Personally we have always felt that the US Fed's decision to hold off rate hikes has been priced in since October last year. The recent, actual confirmation by the Fed wasn't taken positively by the market - on the contrary, it actually fell. Hard. (Editor's Note : As of 5 April, markets have strengthened to new heights thanks to that other old news - resolution of the trade war)

Some background: the previous Friday, 22 March, the S&P500 index fell 1.9% - a humongous one-day decline. This obviously would have a knock-on effect on Asian markets the following Monday (25th). Indeed, Japan's Nikkei opened nearly 3% lower, with similar reaction in Hong Kong and China's markets.

Malaysia was no exception. We know that in these kinds of situations (and we have been through many), there will be a temporary phase of panic selling. Investors would dump their shares at the market open, causing an immediate loss of liquidity in some stocks. This causes the stock to fall faster.

Now, back to DAYANG. The stock had already gone through a major pullback from a recent high of RM1.70. On the previous Friday, it dropped to RM1.33, with steady selling activity throughout that whole week.

As a general rule, momentum stocks like DAYANG (which outperforms the broader market during the good times but also falls harder during bad times)  tend to lose their liquidity quickly in a market panic scenario. For us, that meant a contrarian opportunity would present itself. 

We fully anticipated DAYANG to fall further on the 25th when the Asian markets reopened, bringing with them the panic and general market negativity.

You may ask: how did we pick DAYANG? Simple: we've always been watching it, although we didn't go into all the craziness when the stock skyrocketed. (Editor's Note : we say 'craziness' but for traders, such movements are not a bad thing)

These two factors - a panicky market and a weakening momentum stock - provided us with a great chance to come in and buy into the weakness. Our general strategy is simple as we are anticipating the following scenarios to occur, one by one, if our trade was to turn a profit.

1) The entire market opens weakly.

2) DAYANG's price would fall lower and quicker as investors dump their positions.

3) This means there's a chance for us to buy into DAYANG at below RM1.30 levels. This represented a 20% price discount from the recent peak of RM1.70.

4) We accumulate a position before the market recovers and buyers return.

5) Buying interest should return faster and stronger when the share price goes back to its breakeven point (Friday's closing of RM1.33). We know this by experience.

6) Our almost assured minimum profit is that spread between whichever price we bought into and RM1.33. The rest (any price beyond RM1.33) is bonus profits.

7) We will try to sell at a profit on the same day the trade is made. Small profits are OK, but we'd like to target at least 5% in returns.

The following is the 5-minute price chart for DAYANG on 25 March, from 9:00AM to 2:35PM. We bought into the shares during the market weakness phase (in the first hour of the market open) and sold shortly before lunch, assuring us of some well-deserved lunch money (we go hungry faster when markets are volatile).


You can probably guess : the seven things we anticipated actually became reality, one by one. But they are not about correctly predicting seven disparate things. It's about understanding the chain reaction and what comes next. From this we apply our trading strategy, with full intent on exiting at a profit as planned. We had no interest of taking this position further (you can probaby guess: the stock went up a lot further than our exit price point). (Editor's Note : Since 25 March, the stock has barely gone further. As of 4 April, it peaked at RM1.44)

But still, a 5% return on investment is excellent. Within 3 hours? Just as great.



Outcome
Gross profit : RM1,056
Return on investment (ROI) : 5%
Duration : Intraday, 3 hours











Monday, 1 April 2019

TRADE OF THE WEEK #8 : GETS GLOBAL BHD


In Malaysia, famous new board appointees and stock rallies go hand in hand. We can count such instances one by one, but we'd quickly run out of fingers. Whether it's Najib's son, Muhyiddin's relative's, or Tun Mahathir's children, historically we have seen so many stocks go up simply because a prominent name surprisingly turns up at a company.

What kind of company? They tend to be small, had seen better days, loss-making, and firmly belong in the penny stock category. We've seen stocks like EASTLANDS, EDEN, THRIVEN, and others move due to the new or existing connections with these political type figures. For today's TradeOfTheWeek, we present you with the latest one:




On 29 March, the stock moved quickly from the previous day's closing of 13 sen. If we were smart, we would've monitored the stock from the get go. But we only found out about the appointment after the stock had hit 30 sen within twenty minutes; a frankly preposterous 130% rally. 

Don't get us wrong. We love electric buses. But this trade is not about fundamentals. It's not even sentiment-based. To us, this is where we get to flex our technical trading skills.

But first, we had to accept that we're attempting something just as preposterous : buying into a stock after it has rallied by 130%. In a day. 

To survive this high risk, high volatility play, we had to take a very close look at the price and volume activity, as we will demonstrate.

This is an extremely short term trade which allowed us to exit with outsized profits. In all, it took about 20 minutes.

THE TRADE

So by the time we decided to jump in, the stock had already fallen off its highs. From 30 sen, presumably due to the early stage illiquidity combined with panic buying, people came to their senses and sold off the stock. 

GETS fell all the way to 21.5 sen before it suddenly found some support. This was when it started to get very interesting for us.

5-minute chart for GETS on 29 March 2019. 9:00AM to 10:35AM. Note the 'U' shape, indicating a recovery rally.

Without sugarcoating it, we were trying to find the bottom. We were also trying to time the market. These are two things that we don't usually do (they tend to be very speculative and do not offer a discernible 'edge'), but in this instance they are useful.

Notice the big black candle earlier? That's the peak panic selling point, in our view. While it's plausible that the stock can continue falling to 20 sen and below, it simply didn't. In fact for the next 20 minutes we identified clear accumulation activity at the 23-23.5 sen range. This does not confirm the rally is continuing, but we made preparations to go in.
Look at this block, representing a trading range of between 23.5 sen and 25 sen. We eventually decided to go in at 24.5 sen. The large block that we acquired represented our convictions. However, we were ready to bail out if the stock falls back to 23 sen. In essence, that's our 'stop loss point'.

Also, we came to a point of conviction, allowing us to put on a trade : if the stock was to break 20 sen and fall further, it would have done so already. It didn't.

Within those 5-minute increments, you can see that the price is inching up. We anticipated that the recovery will either happen quickly, or it won't. Note that we view this 'block' as a physical barrier for compartmentalising our trading idea. Our range of buying, and stop loss point, are represented within this block. If prices move upwards and out of the block, we can start worrying about taking profits.

About 20 minutes later, the stock advanced upwards, breaching the block. We had planned to take at least 10% returns at our exit point.We certainly did so at 27.5 sen. Naturally, the stock hit higher points later that morning, but our participation is complete (we try not to chase ever higher prices).

The success of this trade really boiled down to these factors:

1) Experience (we have seen this type of activity in other stocks before).

2) Technical analysis (an understanding of price and volume activity).

3) Knowing when to exit (instead of staying and risking volatile fluctuations in our paper profits).

If you'd like to trade this way, think of these movements as blocks when determining your entry points, exit points, and targeted gains. Either your expectations are met, netting you good profits, or they aren't. At least you won't have to wait too long to find out. 






Outcome 
Gross profits : RM2,600
Return on investment (ROI) : 11.74%
Duration : Intraday, 21 minutes







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