Monday, 24 June 2019

TRADE OF THE WEEK #15 : GREATECH TECHNOLOGY BHD



Outcome
Gross Profits : RM3,862
Return on Investment (ROI) : 5% and 4% (2 succesful attempts)
Duration : 2 Days

This trade was a continuation of our contra IPO strategy described in last week's post. Following three rounds of trades accumulating in five-figure profits, we stretched that record a bit with Round 4 and 5 in this post.

We personally feel that the current rally may have overheated with prices going up too fast. However, this feeling did not stop us from trading a position in GREATEC yet again - we don't usually let common sense get in the way of a good trade!

The truth is, we (society, not just us) fully believe in our personal biases. We love feeling smart when it becomes true; if it doesn't, it's conveniently forgotten. Biases are as good as guesses, and whether you believe this or not, guessing has absolutely no place in trading. 

Every action taken must have a reaction in mind. This means that a trade can be distilled into a continuing series of plans. If the stock hits 95 sen, you would buy. Or, to make it more thorough (and effective as a risk management measure), if the stock hits 95sen within one hour, you'd buy the stock.

The difference between the two? The first is open ended, while the second is a ring fence approach; it forces you to focus and act. In trading, not having a proper plan is when you start... guessing.

One useful analogy is to think of a trade as flying a commercial jet. It is indeed a matter of life and death (money = your passengers), and you carry a heavy burden to ensure a satisfying conclusion, which is a safe and timely landing (exiting a trade with good profits).

Obviously flying a plane is not just about going from point A to B. So why would you think differently about stocks? In flying, a series of tasks need to be done to ensure that the plane is doing what it's meant to do. Wind measurements (market volatility), the weather forecast (broader market environment) and a whole host of other things.

Good pilots are like good traders; they would be well paid assuming they do the job correctly. And like pilots, traders must have their own checklists to complete.

A trading plan is not about buying a stock just because that politician's son's company's stock has gone up. It is not about buying Speculative Construction Counter B just because Speculative Construction Counter A has rallied (and conveniently shares a common shareholder). Guesses cannot be quantified, but probable outcomes can, at least to an extent.

Our trading approach is basically a series of plans, distinguished by their probable outcomes. We are almost always reactive traders - that means we try to wait for a confirmation in the stock's movement before committing to a large size. 

These confirmations are valuable for us. They are the 'triggers' that pushes us over the edge; we would proceed to get as much as we can of the stock with utter conviction. In GREATEC's case, the triggers are essentially a validation that a stock's momentum is continuing, and that we can expect a sizeable increase in share price at least within a 24 to 48-hour period. 

We did this successfully in Rounds 4 and 5, proving that this was not a fluke. You can apply these concepts in your own trading, but be aware that they require constant observation of the stock. In other words, the wiser uncle traders of this world would probably take an MC to stay home and watch the counter.

Regardless, the smartest people in the market will always be those who acquired as much GREATEC stock as they can on Day 1 and simply held on to the position until today. We are not one of these people. The multiple rounds were necessary to lower risk and save us from the stomach churning volatility exhibited by momentum counters.

We missed out on a lot of potential profits by not staying fully invested all the time. But going in and out meant that we are saved from the downside volatility, any of which could have marked a permanent downturn in the stock. 

Another benefit? We can make four figure profits in a matter of hours and exit the trade with a positive frame of mind. No need to worry about overnight risk and potential gap downs the next day. If we see opportunity, we can always come back - hence why we did five rounds on this thing. 

We won't over-complicate the explanation to these trades; they're fairly simple to apply. We will show the triggers, represented in the charts, the outcome, and the profit opportunities.

ROUND 4

On 18 June, GREATEC has a little 'gap up' moment - it opened at 92.5 sen, compared to the previous day's closing of 90 sen. Within 20 minutes, it strengthened to 94 sen but gave up the gains for the rest of the morning.

By 10AM, we had considered the potential outcomes to frame our trade. Worst case, the stock goes back to 90.5 sen and possible breaches 90 sen. Best case, the stock hits 94 sen and begins a powerful rally for the rest of the day.

Naturally you'd consider 94 sen as the resistance point, right? That's correct, but it is what you do with that info that matters. For momentum stocks like GREATEC (and we have some experience in trading fast-moving IPOs), their consolidation phase does not last long; in fact, they can be in a matter of hours only. 

Having identified the probable outcomes, it was time to think of a position. We allowed a bit more time for the consolidation to play itself out. We explicitly planned to buy into GREATEC if it suddenly exhibited upwards movement to the 93.5-94 sen range.

This is reactive trading, but not in such a way that we'd miss out on most of the upside. A safer way was to trade once the stock hits 95.5 sen or so, thus fully confirming that the momentum is continuing. But the best profits don't come from playing it safe; we were willing to risk a small loss in order to capture a bigger profit potential. That minor upwards movement was the trigger for us. And you know what this trigger is worth? A quick 5% return on investment.

By 2:30PM, wouldn't you know it - GREATEC surged to 94 sen. The last subtle aspect that prompted us into the trade is the velocity of the stock's move; the price and volume activity was an added element of confirmation for us. In other words, when this moment occurred, we know that we had to get in.

The following five-minute intraday chart proves our point. They confirm that the trend continued, that we bought exactly when the surge was occurring, and that the position worked itself out for the rest of the day.


As a basic rule, if the stock price consolidates in the morning and surges in the afternoon, it's either a false breakout or a real momentum move. This guided us to hold on to the position for as long as we can. 

It was a comfortable ride since we happened to acquire the stock at the final moments before it went skywards - GREATEC never came down to earth, which for us was the 93-94 sen range.

Now for the exit. How did we know to sell the stock when we ended up selling it? This part is easy: a surge beyond RM1 almost never occurs for a stock that's never been at that point before (Editor's Note : we know this by experience). It means that we'd always end up selling just before that all-important ceiling is reached, which was why we evicted ourselves from the stock at 99 sen. 

We're saying that it takes time for a stock like GREATEC to get beyond the RM1 mark. Maybe it would fall back first (a lot likelier). Maybe it needs to test that RM1 resistance point several times. Whatever it is, we ended up with good profits for about two hours' of work. We knew that we didn't want to continue holding onto it until the market close.

And above all, despite all the planning, we knew we were fortunate to achieve this yield. So we got out with conviction.




ROUND 5

Remember when we said the stock might fall back? Of course it did.

This is where our strategy to go in and out was justified. We didn't need to deal with the headache of the stock losing 10% in value quickly. We had the privilege to wait until the stock shows its next move. Either it will return or the rally ends (Editor's Note : we probably thought the stock would stop going up at least on multiple occasions : at 70 sen, 80 sen, 90 sen, and RM1. We have been consistently wrong.. so far).

Anyway, GREATEC retreated from a high of RM1.01 early on 19 June (the false breakout) and subsequently fell to 94.5 sen. For the next 24 hour period, weakening was all that it did as speculators, traders and punters rushed for the exits.

On the morning of 20 June the stock was firmly in the red for the first time since listing, hovering at 92.5 sen. We knew that this was a pivotal moment, and we came up with some probable outcomes:

1) Stock goes below 90 sen in the afternoon.

2) Stock goes back up to breakeven (yesterday's closing price) of 96.5 sen. That's a 4.3% upside. Not bad.

3) If (2) happens, we'd probably try and get into a position....

4) High volatility drives the stock to the RM1 mark again. Best case scenario.

Remember that on 20 June, all this was not very clear. GREATEC seemingly looked very weak, but lacking in panic selling activity.

This is where one of our favorite phrases comes into play: "if it wanted to go down so much, it would've done so already leh..."

And by 2:30PM, this it didn't do - there was no break below 92 sen. Instead, the opposite happened: a quick surge to breakeven by 2:45PM. Probability (3) is occurring, and it may be linked to Probability (4).

The surge was like this: GREATEC went up from 94 sen to 97 sen within five minutes, easily reversing the earlier sentiment of weaknesses. We figured the market would jump back in at the slightest opportunity of a rebound; we just had to be fast to capitalise.

We were not fast! The stock had already hit 99 sen by the time we had a chance to get in at 98 sen. This was a slightly risky proposition but our targeted range was small. With our sizing, a 3-4 sen movement would already yield us a four figure profit. At 98 sen, this meant an approach towards RM1.02, or a new high.

What were the triggers to make us jump in? If you guessed the sudden surge, you're probably one of those who sat in front of the class back in school. The second reasoning for us was the velocity of the move: when a seemingly weak stock (10% off the highs) transformed its status within minutes (just 2% off the highs), you'd better be paying attention.

Our trade plan for Round 5 was to get in at out within small margins. The high risk profile of this stock, at this point in time, demands it. With all this in mind, within 19 minutes we exited GREATEC at RM1.02 for good returns all around: 4% yield and about RM1,500 in gross profits.

The following chart shows the 24-hour consolidation phase, the sudden surge, and our positioning, for your viewing pleasure.


And for some final wise words:











Popular Posts