Sunday, 10 November 2019

TRADE OF THE WEEK #25 : MUDAJAYA GROUP BHD


Outcome
Gross Profits : RM4,608
Return on Investment (ROI) : 10%
Duration : 2 days



Despite what our trading style and profits might suggest, we are actually very conservative traders. 

We almost always miss out on the 'meaty' part of a profitable trade. We'd sell a stock at 20 sen and watch it go up to 28 sen. Or exit at breakeven point just before the stock skyrockets. It happens to us all the time. 

But as we always like to say:


Things seem clear and easy to digest when they're in the past. In the present - and by this we mean during that stressful time of active trading - you will have to make decisions based on limited information.

We frame our mindset this way: trade, meet the predetermined targets, get out. And disregard what happens next.

To take the logical thinking process further : why regret losing profits you never had in the first place? Sounds obvious, right? But yet... people think like this all the time.

When you take a profit - let's say RM500 - the most important thing is not the fact you missed out on an additional RM300 in profits had you stayed in the trade. It's actually whether that RM500 was the result of calculated planning.

"Profits from planning always beat profits from dumb luck over the long run"


Our followers know this conundrum well. When we disclose that we have exited a stock at this point, we almost invariably exited too early. Perhaps if they're really smart and devious, they could follow our trade and exit a few points above us constantly. Perhaps....😈

So it was this situation which we found ourselves in. The trade was in MUDAJYA, a well known but long-suffering stock. The construction company has had some troubles in recent years, and the market battered the stock from RM1 all the way down to 20 sen in two years. 

We ended up exiting this trade early but do we care?? The answer is... yes. Otherwise we wouldn't have written the rant above to make our point.

But to be clear, logic trumps emotion. We understood our rationale for exiting and we made peace with it. We didn't get greedy. Can't lose what you never had, eh?

Anyway : MUDAJYA is a very interesting case study. We'll explain how all the pieces fit together, and how you can formulate a trading idea just like how we did it. 

THE TRADE


The last week of October was very kind for penny stocks. We saw incredible rallies left and right, some for no particular reason. We usually don't trade penny stocks, but we make exceptions for exceptional cases.

Here's the thing about exceptional opportunities : you have to recognise them quickly, and capitalise on them. This means moving from trade identification stage to execution within minutes. This is something we can do, out of experience. You have to spend some time (and more than some money) tinkering with this kind of approach. Believe us, there's a pot of gold at the end of this rainbow if you're willing to work on it.

MUDAJYA was an exceptional case for a multitude of reasons. We will break down the different components that contributed to our decision to trade this thing. 

Be forewarned that this was not an easy trade. These components have to come together; then you have to understand the collective whole as a singular insight.

If you're too late at figuring out, you won't get good pricing. If you invest first and investigate later, you stand a chance to lose loads of money. So the optimal point of execution is somewhere in between - limited information, but decisive action at the right time.

Sheer conviction is necessary for us to come in and build a meaningfully sized position in order to make profits. If we don't have it, we would be indecisive. We'd be toast.

1) Price-volume analysis:

A rally from 20 to 30 sen in one day is nothing to sneer about. But simply buying at the peak would be a foolhardy decision, yes? So what you need to do is look at how the stock deals with a price correction.

MUDAJYA presented a golden opportunity; on 30 October, the stock suddenly broke the 30 sen mark  (from 22.5) and peaked at 33.5 during the morning session. 

What really matters next is how the stock performs at the 30 sen mark. Tantalisingly, MUDAJYA closed for the afternoon break at 31 sen.

Here we have our first set of expectations : if momentum is set to continue, the stock should consolidate temporarily at the 30 sen mark - an obvious support/resistance point - before staging a new breakout. What this really means is : better price and better volumes at higher levels.

The visualisation of this whole theme can be found in this five minute chart on 30 October.

Buy range as described via the Telegram message above

See the 'spike' on the left side? That seemed like strong volatility within a 5-minute period just before the morning session close. Someone was clearly buying large volumes at any price. As highlighted, it peaked at 33.5 before closing at 31 sen. We know it's a big deal because this involved 76,000 lots traded. That was the first indicator.

2) A positive market:

This is so incredibly awesomely important. We prefer to see the broader market to assess its 'health', and by extension, investors' enthusiasm.

It was no trifling matter that on 30 October there was a slew of inexplicable movements in small cap counters. You should know that these kinds of movements are cyclical, but they are not trivial.

This kind of enthusiasm is supportive for cheap stocks, and MUDAJYA was well positioned to benefit. We noticed (as did everyone else) that the stock moved harder and faster than others. Maybe there's another reason for it?

3) A mysterious stock-related development

This was evident in the buzz generated across day trading chat rooms when a large block was apparently transacted in MUDAJYA, in what is called a Direct Business Transaction (DBT).

It was definitely worth salivating over the fact that this transaction was done at 38.5 sen a share - MUDAJYA's stock started the day at 22.5 sen on 30 October.


After wiping the collective drool off our faces, we decided to make a move. The final decision is really down to experience, instinct, and the willingness to absorb losses if this thing turned south. It was a worthwhile opportunity.

You can see our trading parameters as shown above. When we came up with that, we managed to synthesise all these bits of information - technicals, market mood, news flow - and come up with a decision quickly. Obviously being fast made all the difference, as this was intended to be an intraday or contra trade.

The stock closed at 34 sen on 30 October, slightly below its intraday high of 35.

The next day, it exploded again, giving us the freedom to exit at our chosen price point. We opted to dispose at 10% yields; no mean feat as this was achieved in less than 24 hours.


Sold at 36 sen. The stock hit 39 soon after.

Too early? Of course it was! But hindsight is 20/20.

What really mattered was having a right plan and sticking to it. It's the road to riches.

(Editor's Note : Update, 9 November 2019 - a bit more light on this MUDAJYA theme that we will keep watching)















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