Sunday, 4 August 2019

TRADING AROUND THE RUMOURS : HEITECH PADU & SCICOM



Immigration makes money off of you. Have you ever made money off of Immigration? We did. Source.


Bloody hell, do we hate rumours.

Market rumours. Onion aunties. Things that do not contribute much to community empowerment or a functioning society. 

In the stock market, rumours are like a virulent strain - they will kill you slowly and surely if you're not cautious.

But hey! Despite all that, rumours can be profitable as a trading strategy. Just not in the way you might think.

If your uncle hears a particularly interesting rumour about a 'sexy sector play' or 'new government contract', please slap some sense into him. Let us explain.

Trading stocks based on a rumour you just heard = death.

Trading stocks based on how you anticipate the market will react to such rumours = profit bonanza.

In other words, don't trade the rumours. Trade around the rumours. 



We can fit this approach nicely into our core Rukun of artificial mispricing. We all know rumours have a way of driving stocks to dumb heights. That's OK - stocks will go wherever the market takes them. But to make a profit and exit before the mania ends; that's a different story altogether.

Let's say a stock gets so aroused by these rumours (it's really your punter uncle who's aroused, but we're trying to keep this post SFW) that it goes all the way to limit up. To make money here is seemingly easy: you just gotta be early, right? Or better yet, be early by being lucky.

Free of charge, we offer to slap some sense into anyone who uses luck as a trading tactic. Instead, what if we say that there's a concrete strategy to trade these kinds of things?

The ingredients are as follows. Let's keep it simple:

1) Analyse the rumour / piece of speculative news.

2) Draw up a set of expectations on how the market reacts to such things. Perhaps from Less Likely to Most Likely. (Editor's Note : for the mathematically minded, utilise probability tables)

3) When the real life trading scenario unfolds, trade based on predetermined strategy and key targets.


Right, so here's the rumour. It's a juicy one. 


And this:

The Edge, 20 July 2019. Go subscribe.

Want to be a reckless, irresponsible trader? Sure, go ahead. But at least do your homework first.

To even stand a chance of successfully trading this angle, you need to already be aware of the usual suspects. Read the news. Look for insights. Pay for them if you must. Money does not just fall from the sky - though they just might, had you already known what the likes of Heitech Padu and Scicom MSC have to do with Immigration.

Basically it's all here:


That piece of news was more than a month back. That's the thing about contracts-based rumours. They persist, and if these stocks suddenly rally to new highs, you would think that some real news was imminent (ha!).

An adventurous fund manager would likely simply acquire the shares of all three companies a month ago and just twiddle their thumbs in the subsequent 36 days. This would have been a hugely successful strategy, actually.

But most of us are like cheap McValue meals : we are small fries.

So are content with speculative trading when the conditions, and prices, suit us. Everyone knows that in the stock market, the expectation of contract wins (and cancellations) are a powerful force. 

Multiply that force exponentially if it's a multi-billion ringgit government linked project. We are fully aware of this, having experienced a lot of fun and nightmarish times, documented here, here, here, and here

But first, let's throw away the rulebook for a while as we introduce the key players and trades in today's blardytale...

CHAPTER 1 : TRADING IRRESPONSIBLY... UP TO A POINT  

19 July 2019 (Friday)

Note that the first two news stories mentioned above were published on 20 July. Like some of you who are reading this, we traded HTPADU on 19 July. We were among the unfortunate breed of traders who, since last year, would hear the name "HTPADU?" and bark "government contract!".


Rumours are dumb, right? Let's take it to another dimension of zaniness : trade the stock even before the rumours come about.

We take the opportunity of this first sentence to admit : yes, we threw caution to the wind with this trade.

Safety planning? None. Being responsible? Nada. Logical thinking, like we have preached about a hundred times? Zit.

We introduce another part of our skill set that is more dark arts than enlightened and empirical: intuitive trading.

The practice is frowned upon, but then again, we frown upon anyone who uses technical charting terms ("honey, you killed me at 'bearish engulfing' "). And yet intuitive trading can be very valuable indeed.

We are discretionary traders at heart. Our approach tends to be grounded in logical thinking, as far as we can commit to it. But there are times when you have to throw the rulebook away. Intuitive trading is also a discretionary act, though it's not one to be taken lightly (Editor's Note : when we do this, we are truly frightened).

We suppose you can also call it as 'getting a feel for the markets'. Intuition does improve with experience; in fact, your decision making process is reliant on it to some extent. Perhaps you can execute a trade slightly faster when you have intuition, and for short term trades it can mean the difference between a huge loss and a huge gain.
This method can show its true usefulness in special situations, such as when a stock becomes highly volatile. We love assigning newfangled terms, so let's call this 'new volatile breakout'.

The intuition that guided us in entering HTPADU was this : price has moved. Go in first - no time to wait. The rumours are bound to follow. 

HTPADU : THE TRADE

We gouge our eyes out when we read about 'head and shoulders', but we are technical traders too; we  look at charts all the time.

What we do is to try to make sense of the stock's day-to-day price moves and trading volume. Stocks tend to strike us as having specific personality traits: they can be Subdued Sam or Volatile Vivian.

In HTPADU's case, it was the latter. The stock experienced a new volatile breakout on 19 July 2019 without rhyme or reason. No matter; evidently not having any news is not a hindrance to the stock doing this:

The real insight here is that you now know we don't use an iPhone.

Thurth-teenh years! To put that into context, this is where it's important to know the backstory from all that reading you were supposed to have done.

Perhaps there's an info leak somewhere. Perhaps the remisiers and syndicates have deployed their big guns. The rumours were already swirling.

Not that we needed proof for all this. Our sole guide is in the prices. When HTPADU breaks RM1 without a sweat and tries for RM1.18 in the same day, we knew something was up. Real or rumours; it did not matter at the time.

Now, you know this thing is worth looking into. If you don't, we offer some reasons:

1) Stock broke RM1, barely looked back.

2) The 13-year high does not hurt.

3) You should really know that the sector is a very 'hot' one, especially when you know what this company does and what the backstory is.

4) Volume suddenly picks up in the afternoon. In fact, a sudden surge propelled it to a point where it could possibly hit limit up. Spoiler Alert : it did.

Here's HTPADU's 5-minute chart in all its glory on Friday, 19 July: 


Notice that the first big surge happened at around 10:35AM. We were keen to go in, but at what point?

Another big thing : see the 'false breakouts'. The stock essentially tried to breach RM1.18 at least four times for the rest of day, each without success. But came the fifth time, and it did. We got our into a position at the fifth time.

To us it was an intuitive decision, but there were clues abound. If you like your charts, notice that from 3:30PM onwards the stock did nothing but go up. All green candles in our self-patented bullish indicator - the 'stepladder pattern'. These were signs of steady and deliberate accumulation activity.

The second trigger for us was the sudden volume surge. By 4PM, interest in the stock did not wane, and in fact it was the complete opposite. We noticed more buyers emerging.

The third trigger was the timing. When an upward surge occurs at the last hour of trading, you can reasonably deduce that there's more of that wherever they came from.

The volatile up-and-down movement for that day mask the traders' true intention: to accumulate a large position in HTPADU's stock. When everybody else catches wind of this, there's no way to go but up. Limit up, to be precise.

We bought into HTPADU at RM1.18 and deliberately rode it to RM1.25; this was in fact our exit point. The stock's limit up point that day was RM1.26. We were not keen to hold the position over the weekend. We have a social life too, you know.

We settled for RM1,400 in profits for 8 minutes' work. That's enough for us to subscribe to The Edge for about seven years. Not a bad deal! (Editor's Note : the article was what gave us conviction to trade this and the other stock which you will soon read about)





CHAPTER 2 : SQUEEZE SOME CENTS OUT OF THOSE RUMOURS, BRO



 Our next guest needs no introduction...

22 July 2019 (Monday) 

We thought long and hard over the weekend about what lies ahead for HTPADU. It was likely that the stock might continue its ascent - it did close at limit up on Friday (RM1.26) with 8,000 lots queued at 'buy', after all. 

What we were hoping to see was a sluggish start on Monday. A decline, followed by a sudden recovery. We had planned to get in somehow.

Surprise, surprise : HTPADU opened four sen lower at RM1.22. It even fell to RM1.18 for about a minute. However, it came and went too fast. Within two minutes, the stock surged to RM1.32 and we missed the boat.

Even worse - from our perspective - is the stock's erratic movements thereafter, usually a byproduct of it being illiquid and from the influx of speculative capital. This was FOMO in full flow.

From RM1.32, not only did HTPADU fall back to RM1.23, it then skyrocketed to RM1.39 within the hour. The stock closed at RM1.28 on this day; you probably get the idea about how volatile this thing was. 

At this point (in the morning), we did not intend to get back on this rickety boat, so we turned our attention elsewhere. We knew not to trade IRIS, another company that was rumoured to be in the running for this mythical Immigration contract. The stock didn't pass our filter due to its excess liquidity. It just wouldn't move up as much.

But we did cast a lusty gaze towards SCICOM, which seemed to fit the bill for a stock poised for a rally. 

The thinking was as simplistic as it was insightful : if HTPADU is up a lot, why not SCICOM? There was no indication that one company over the other would win the contract; if that was the case, it would have been spelled out in the earlier news reports.

As a matter of fact, both SCICOM and IRIS rallied slightly on the morning of 20 July, at the same time that HTPADU was undergoing all the craziness just described. 

So we did what we do best with stocks, instead of people : we court them without the intention to marry. In other words, we cast SCICOM into our little watchlist and waited for some sort of buying activity to happen. 

We observed the stock when it was at 92 sen; it was already up by 3 sen on this day on very low liquidity. We contemplated a small trade that we figured carried a big upside. 

We already had validation that the angle of this story is a juicy one. HTPADU has already showed how strong this rumour driven price move is. We initially did not think anything interesting would happen with SCICOM, but we were proven wrong quickly.

SCICOM : THE TRADE

There's another crucial element that made this trade work successfully. The chart is gooooood. Below is the daily movement for SCICOM from 23 June to 19 July 2019.


Spare us the candlestick charting nonsense and focus on the price moves alone. Check out the green candle on 11 June: notice the peculiarity?

Indeed: 


11 June news report. Again, basically it's all here.

We love proofs of concept. From this you can see that the stock is especially sensitive to this supposed job that it has front runner status on. The price move essentially validated one thing for us: whenever there's even a whiff of the rumoured Immigration contract being announced, SCICOM is poised to move. How big of a move is the main question.

With HTPADU's move on Friday and in the early hours of Monday, this was blindingly obvious to us. It would be apparent to everyone as well soon enough, so the key to profitability here is to move fast into SCICOM, which is what we did. 

Notice that we first observed SCICOM when it was at 92 sen. It has already breached a new high in two months. And then the move from 92 sen to 94 sen quickly happened, almost imperceptibly. 

To our horror/delight, as is the case for the best trades, we struggled to get in. Some orders were not met as the stock simply moved too fast. We were fortunate to get in at between 94 sen and 95.5 sen. This thing was poised for the stratosphere.

The 5-minute chart below on 22 July shows the rocket launch, and our entry point:


Within the next 20 minutes, the market got wise. HTPADU's not the only game in town. The sudden buying interest brought SCICOM all the way to RM1.15, or a four-month high. 

As usual with normally illiquid stocks, they become most liquid at the peak of major rallies. As per our usual cautiousness, we committed to sell into the buying frenzy. We sold off everything between RM1.03 and RM1.07, which is not bad, but the stock obviously headed higher. 

You'd expect us to rue all the missed profits since SCICOM went higher - we gave up on almost RM3,000 in additional profits - but that's really not how trading works. We didn't care if this thing hit limit up like HTPADU; our priority instead was on capital preservation and exiting at a good profit. We dictate our own rules.

By leaning on our 10% profit target, we successfully got out on our own terms. We look like fools by selling at RM1.03 when the stock went to RM1.15, but we look smart and felt cute when SCICOM actually closed the day at 96 sen. The lesson? We don't care about how we look.

Again, putting everything in context: we managed to get RM3,550 in profits in 15 minutes from the SCICOM trade. That counts as RM236 in earnings every single minute. And we got our treasured 10% yield, the only benchmark that shows why this risky trade was worth undertaking.






So the next time you read about multi-billion ringgit government linked projects, remember to do the hard bits. Read up on your shit. Try to understand all the angles and permutations. Figure out a way to get in. Most importantly, figure out a way to make money.

Once you do all that, the trading is really the easiest part. This rumour alone got us five grand.






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