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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)