Sunday, 20 October 2019

TRADE OF THE WEEK #24 : GUAN CHONG BHD



Outcome
Gross Profits : RM10,500
Return on Investment (ROI) : 31.5%
Duration : 3 days

Support. Resistance. Support. Resistance. You hear this a lot in group chats and investment forums. It's no different on this blog.

The collective wisdom of the markets sometimes would propel a stock upwards and onwards, until it suddenly hits a roadblock. At certain price points, there are clearly sellers waiting to dump their positions and exit.

Everyone understands the following. We have written it in such a way that even a 5-year-old would understand (just replace 'stock' with 'bananas').

1) Support - price point where people keep buying the stock.
2) Resistance - price point where people keep selling the stock.

Conventional charting wisdom dictates that round numbers tend to be key points for support and resistance. Let's take RM1, which for a stock can be a resistance point until one day it becomes a support point. The sellers have been exhausted, and in a market of more buyers, the stock goes up. Easy peasy.

This example also applies at different price points. Market psychology suggests that people are obsessed with round numbers. So it is somewhat natural (and intuitive) to encounter support and resistance points at RM1.10, RM1.20, RM1.50, RM2, and so forth.

In this ongoing battle of buyers versus sellers, somebody will lose money. Hence you will encounter certain patterns that are easily understood for most of us with a basic knowledge of charts.

In this case, we're talking about the 'zig-zaggy M pattern'. It's also known as 'head and shoulders' in charting parlance, but we feel our term is equally descriptive and just as silly.

We go out of our way to try and not offend people, but we get dirty looks when we say that we reject the majority of what constitutes 'technical analysis'. Hence terms like 'bearish engulfing' and 'falling star' are as arcane to us as 10th century Sanskrit. 

We do not have a vendetta against technical analysis. We're also too lazy to evangelise and offer our approach as a better one instead (Editor's Note : it arguably isn't. Who knows?). 

We're just saying that we use an approach that works for us. Believe us, we've read the literature and applied all the popular indicators, be it Bollinger Band, RSI, SMA, EMA, or IM4U. We are failed technical analysts.

Our primary skill is in price-volume analysis. Applying this knowledge via trial and error in our trading activity has made us pretty decent in what we do. It's basically why we managed to achieve a 31% gain in three days, as well as RM10,000 in profits (yes, in three days). We know exactly how much that skill is worth.

Now, back to the zig-zaggy M pattern and why it was just one piece of the puzzle for this trade.

WHO DOESN'T LOVE CHOCOLATES?

The company is Guan Chong Bhd, or GCB for short. We had been tracking it for about five months, and are generally aware of the business fundamentals. The company is generally awesome.
But the trade was not really about the fundamentals; it's about the charts. And the resistance point here is one epic, multi-month battle of wills.

The chart below is from January to end of September 2019. We omitted the October breakout - we figured you know where this is going.

"Is it more of a zag ziggy M or a zig zaggy M?"

We are not as smart as proper technical analysts or the buy-and-hold heroes. Our capital base is limited, as is the number of opportunities we allow ourselves to be involved in. We wouldn't survive a pullback from RM4 to RM3.40, which happened here. There would be nothing to buy if we were wiped out.

So we designate zones - these are points in which we'd consider a trade. We don't try and catch long term falling knives. If it hits RM3.40, we have no clue if it's destined for RM3.20 or RM5. Those who say they know are probably friends with Marty McFly.


These zones are not trivial : they represent a commitment to trade and to risk our capital. We treat them as if they're sovereign borders. Anything out of this zone is a no man's land - or we should say, no uncle's land

Zones 1 and 2 are essentially resistance points for GCB's stock. One is in April-May, the other in September. That price point is RM4. As you can see, the stock has failed to turn that resistance point into a support point. The day-to-day price movement is erratic : the stock is expensive and illiquid, so it doesn't exactly permit orderly trading - the opposite in fact, which is panicky trading.

The price consolidation in Zone 1 culminated in failure - the stock failed to break out. Market conditions at the time were not exactly favourable either, hence the downward movement.

In late August however, the stock gapped up strongly on GCB's latest quarterly results, plus a bonus issue proposal

We were not in a hurry to trade this. What we want is for the stock to show its mettle and hit the RM4 mark again.


IN THE ZONE

Take a closer look at Zone 2.

Zone 2 (Zone 2)

This crucial range is where the stock tries to prove itself. Call it consolidation or base building; it's yet another battle between buyers and sellers. In this range note that there were at least four attempts to break the RM4 mark. 

And when it did break, jumping all the way to RM4.16 on 17 September 2019, it fell back. the correction was swift. Many would have given up; it's just another false breakout, right?

That was a key point for us; we took it as a signal. We kept watching and bided our time.

Notice that there were clearly two support points in this zone; one at RM3.90 and one at RM4. A breakout is followed by consolidation. Then another breakout happens, followed by another consolidation at higher prices.

It was time to prepare an assault. Keep this aphorism in mind, we came up with it ourselves:

"If the stock wanted to blardy fall, it would have blardy fallen a long time ago"


THE TRADE

As always, we prefer to go into call warrants to maximise our profit potential, and to get returns that are commensurate with the risk we're assuming.

As it so happens, there was a lonely, cheap call warrant to buy. We like fresh issuances - if no one's in it yet, we'd love to get an exposure.

GCB had a few newly listed call warrants by late September. Our pick was GCB-CI, more due to the pricing than anything else. With new call warrants, you can almost be assured that the warrant will track the stock closely. There will be liquidity provided by the issuer. Why? Because nobody's buying it yet!

Transaction records indicate that we were probably the third/fourth account holder to ever buy GCB-CI. And we ended up buying massive sizes, due to the sheer conviction of our view towards the stock.

The source of this conviction? Buying at what we felt to be a fairly obvious breakout point. Know that we didn't try to be smart. We didn't try to be cute by accumulating a ballsy position when the stock is declining. This trade is not a falling knife.

The obviousness (Editor's Note : In hindsight, it is. But not at the time!) was in GCB's price move on 2 October 2019. As a rule, we know that breakouts can be swift. For a fairly illiquid stock like GCB, there would be a fast move in prices - history suggests so, given what it looked like during previous rallies for the stock.

The following is Zone 3 : the breakout zone.

For all we know, this story was the trigger. On 2 October, the stock breaks out from RM4 to RM4.10. If there was a time to put on a big trade in GCB, at any point over the past five months, this was it.

Remember that this whole consolidation in GCB stock took six months to achieve. Any breakouts to new all time highs can reasonably be expected to be a strong and fast move. This is where our call warrant pick comes in.

The trick is to acquire early, and acquire big. Because of the high risk involved, the profit opportunities better be worth it.

And so we did.

Buy and sell concluded : 2 to 4 October

It turned out quite well for us. Not only did we underestimate the strength of GCB's movement, we sold too early as usual. Not that we have cause for complaint: via GCB-CI, we essentially rode GCB's stock from RM4.10 to RM4.53.

And we got our gains.


 You know how we feel about chicken dinners....








Wednesday, 16 October 2019

A BRIEF, CRYPTIC NOTE ON POULTRY STOCKS - LEONG HUP & TEO SENG


This message was originally written on 4 October, 2019

We like to to entertain distant possibilities and far-fetched notions. It's essential in our trading activities.

Think about a poultry counter like Leong Hup International (LHI). Today it's about 90 sen. Been rising a bit lately; prospects look good.

Let's set aside the fundamentals argument for a moment; we all have access to the same publicly available info. We can talk cock about chicken prices until the chickens come home. 

Let's think about the stock, or a number of stocks in poultry. It is hardly a secret that we like the sector, and we are already holding a long term position in a poultry counter.

Just take a moment and think about poultry stocks. Then, entertain some attractive possibilities. In this example it's LHI  and TEOSENG, a unit of LHI, also publicly listed.

LHI had hit a rough patch after re-listing last May. Chicken prices fell steeply due to an oversupply situation. The stock fell to 72 sen; some ways off of its RM1.10 IPO price.

Now let's say things are recovering, which seems the case for chicken and egg prices. From 72, LHI stock is now back at 90 sen.

What do you think will happen if LHI hits RM1.10 again? Here's what we think:

The stock will rally strongly. There will be latecomers and new big buyers coming in. We figure it's the institutional funds that are hungry to get yields. This has already been supportive of LHI prices in the near term. LHI offers a very attractive dividend policy (30% of net profits) to shareholders. Anyone would want a piece of that, plus potential capital gains.

So if LHI hits RM1.10 at some point, likely from improving fundamentals and new buying interest, we expect the stock to go even further, possibly RM1.30. In a down market, these are the kinds of opportunities people will flock to. The KLCI is at a four year low: do you think most people are still buying KLCI counters to get dividends?

The poultry sector is a defensive sector. At the very least, people won't stop eating KFC, or two eggs for breakfast.

So with this in mind, all that's left is to craft a trade. It can be LHI stock, TEOSENG stock, or any of the associated warrants.

Best case scenario is a poultry sector explosion, bringing everything to the stratosphere after some recent struggles. As an associate, TEOSENG will benefit too. It's not too far off from an all time high, believe it or not. Chicken prices are at multi year lows; we wonder what would happen if it recovers just a bit?

We foresee some positive movements in these counters, with a targeted timeline of until the end of this year. We have already bought into our position. They are for safekeeping, like a cozy rooster's nest.

Best thing is, these are not simplistic, speculative trades. The two companies are cash gushers. Their profits can be a bit lumpy, but they are still profits.

It's not a chicken and egg problem. These are gems that the market is starting to rediscover.

Sunday, 13 October 2019

HERE IT IS : THE COMPLETE LIST OF STOCKS TO WATCH FROM BUDGET 2020


To our audience who don't give a hoot about our long-winded stories that go nowhere and all that, here's a treat for you - just the list of stocks that we think would be affected in some way from the Budget 2020 speech last Friday. 

We'll keep the summaries short and highlight the relevant passages from the Finance Minister's speech (which you can read in its entirety here).

To be extra cute, we will also arbitrarily mark the stocks to indicate their must-watch-ness on Monday (14 October) and the rest of the week. 

* - "Can watch lah if bored"
** - "Can get the heart rate up abit only"
*** - "Uncle says you need to watch this"


SIMEPLT*
WESTPORTS*
IJM**
OPCOM***
OCK***
BINACOM***
SEDANIA**
GHLSYS**
REVENUE**
SOLARVEST
GENM*
OWG*
TOPGLOV**
HSSEB**
GAMUDA***
LITRAK**
LBSBINA***
MAHSING**
UEMS**
BJTOTO**
MAGNUM**
EKOVEST***
IWCITY***


A few caveats here:

1) These are just stocks that may be linked to the Budget 2020 announcements. They are not buy recommendations, and the potential impact is not necessarily a positive one. It's a watchlist.

2) We chose the themes that we feel are most relevant, or contain a direct impact, to the companies.

3) We chose the stocks that are most relevant and filtered out the more speculative names. We also left out certain lousy stocks that we would not buy in a million years.

4) These are short summaries only. You have to do your own homework and dig deeper.


PORTS



SIMEPLT - Largest landowner on Carey Island. The speech excerpt implies that the Carey Island port project is still seriously being considered, despite adequate capacity at Westports. This thematic is in the 5 to 10 years range, so don't get too excited just yet.

WESTPORTS - Klang Logistics Corridor to improve transport/efficiency.




IJM - Kuantan Port development funds.


BUILDING DIGITAL INFRASTRUCTURE



OPCOM - Fiber optic cables manufacturing, installation activities.
OCK - Provider of telecommunications network services.


BINACOM - VSAT capabilities and specialisation in satellite broadband tech.


SEDANIA - Hey, they just got into e-sports OK...


BUILDING DIGITAL COMPANIES



GHLSYS, REVENUE - Provider of electronic Point of Sale systems and payment services.



RENEWABLE ENERGY


SOLARVEST (to be listed on 26 November 2019) - Direct beneficiary of GITA and GITE. The company's unit also runs a solar leasing programme.

VISIT MALAYSIA 2020


GENM, OWG - What counts as 'new investments'?? We have no clue so far - the wording leaves things open to interpretation. We're just saying that theme park operators should really consider throwing some money into new theme parks to enjoy these benefits...


INCREASING THE MINIMUM WAGE


A lot of labour-intensive manufacturers are impacted by this, but we will pick TOPGLOV simply as a representative example. That RM100 increase sounds small, but it makes a lot of difference to both employee and employer.

What does 'major cities' mean? Where does the boundary lie between those who are entitled to get a minimum wage of RM1,100 or RM1,200? 

TOPGLOV's main factories are in Klang - is it a major city or not? Would its competitors - some of whom have factories that are definitively not in 'major cities' - have an upper hand? Interesting hypotheticals to consider.


WATER, WATER EVERYWHERE


 HSSEB - Already tendering for East Malaysia water projects. The contracts are there to be won.


MY WAY OR THE....



GAMUDA, LITRAK - Let's cash out, baby.



GET RID OF THAT OVERHANG


This cuts across a large swath of property developers in Malaysia, so let us be more specific. For this incentive, the clear(est) beneficiaries are property developers with substantial exposure in affordable homes priced at RM300,000 or so.

To narrow this further, it would likely be for homes located outside of the Klang Valley, given the price point. We discount any listed developers with exposure to PR1MA - the agency was not even mentioned in the speech...

For us, the compass points squarely at several smaller property developers with projects in states like Johor. So our representative pick is LBSBINA.

MAHSING, UEMS - inventory clearance soon hopefully. These are our two representative picks. Purely from our personal bias, we like the stocks.



NOMBOR EKOR, BRO

BJTOTO, MAGNUM - We think these companies should thank their lucky stars (ahem) as the Government inexplicably chose not to hike gaming taxes for NFOs.


BANDAR MALAYSIA

EKOVEST, IWCITY - Another round of this again then??



To conclude, we'll leave you with this quote:


"Where the hell are all the construction counters?"








Sunday, 6 October 2019

TRADE OF THE WEEK #23 : PRG HOLDINGS BHD (RIDE WAVE + FALLING KNIFE EDITION)





Outcome
Gross Profits : RM6,383
Return on Investment (ROI) : 6%
Duration : 2 days via 2 trades

Rules are great; they are what separates humans from animals. Without rules, a show monkey can day trade and statistically deliver results that are equally comparable to yours.

We obsess over rules. They are crucial in everything that comes with the practice of trading. They tell us when to trade and more importantly, when not to.

Just as important is to follow another bit of folsky wisdom:

"you ain't ever gonna go broke taking profits".

Rules can separate the diligent trader from greed-driven temptations. They help provide better clarity in thinking, and that's the most important asset you can possess in this business. Many blogs and guides - including this one - talk about rules when it comes to managing losses. This time, we will talk about managing profits, which is a difficult piece of skill in itself.

We say difficult because it applies to ourselves, and we are not immune to the vagaries of greed. Instead of being content with 10% profits, that primal, Neanderthal, dumbass part of our brains tells us to go for broke and target 20% profits instead. What eventually happened was that we lost everything and ended up with a 10% loss - and that was just one real life example!

Greed creates indecision, but rules help extinguish greed. Know these two maxims and you're (almost) set for life.

Today's trade contains two parts that utilise completely different skill sets. The first is momentum trading, and the second is downside volatility trading. Over the span of 24 hours, we did both to great effect, and we will demonstrate how theories behind both approaches can be applied in a real life trading context.

WHEN TO TAKE PROFITS?

If we were to summarise this into a neat all-inclusive formula, it would be this:

profit target met (A) + peak bullish condition in the stock (B) = take profits. Go home. Sleep.

(A) is the part where your rule-setting exorcises all those greedy demons. It must be absolute, inviolable, and... chaste. You must write it all down before it happens, otherwise you won't know what rule to follow, comprende?

What you need is a series of predetermined targets. You can use ours; we keep them very simple.

(Editor's Note : your targets should apply to you alone. Adjust things like profit targets based on your skill level and you amount of capital. It's not realistic to expect thousands of RM in profits if your capital base is RM5,000 or below. Be honest, and adjust these targets upwards when you become a better trader).

1) Profit target per trade, absolute number : RM1,000

2) Profit target per trade, yield % : 5-10%

3) Consider an exit when threshold(s) are hit: 
- 1st threshold : profits hit RM5,000
- 2nd threshold : profits hit RM10,000

4) Get out at all costs if:
- yields hit 30%

From (1) to (4), our range is between RM1,000 to RM10,000 in profits or between 5% to 30% in yields. Depending on market conditions, or how the stock is performing, we may decide to stay or sell. 

Obviously the intention is to maximise profits as much as possible, but those thresholds keep us grounded. When we hit them, an internal alarm automatically sounds. Think of Thumbelina on your shoulder, but this time it's a pot-bellied uncle who's also a master trader.

"Bro, this point hit already bro. Take that money and run. Don't be greedy."

Our first trade in PRG shows we applied this thinking. Following the rules saved our skin, and then some.

ROUND 1

We encountered a riddle right at the beginning : how on bloody godforsaken Earth can you trade a stock that looks like this?

PRG, August to September


That's a daily chart. It's ridiculous. There's not much else to add. So can buy or not?

'Can buy' is the answer, but this is a very risky and dangerous situation. It's a stock that had gained 100% in 14 trading days. Suspension of disbelief is necessary.

The 'buy and close one eye' brigade will say that no skill is necessary to approach this trade. You can sort of just buy and see what happens. 50% of the time it might work, but this also includes the probability of you losing 50% of your capital if you're not careful.

No, what this trade needed was a specialised and calculated approach. We did indeed buy shares at the top of this price activity. And it went even higher.

We'll explain our approach step by step. 

We first got into PRG on 24 September. The stock closed at RM1.08 the day before but it opened at RM1.10. This nice little 'gap up' was the first good sign.

There were two things working in the stock's favour, in our view.

- there wasn't much resistance or outsized selling at the RM1 point. PRG blazed a path right through it on 23 September. We liked that.

- on the morning of the 24th, there was curiously little resistance at the RM1.10 level too. In fact, it strengthened some more. We hearted that <3

To begin with, we entered into a position and set a very tight stop loss point. We were wary, not worried. Either this thing works or it doesn't work, but quickly.


We were only willing to risk a 2 sen loss per share with this move. We were fully aware of the risks of buying at the top. The RM1.18 target was a lofty one, considering where the stock is trading at in the charts.

There were some minor selling activity at higher levels but eventually the stock ended the morning session at a new high. We were holding on to our position.

As we anticipated at the time:


To cut a short story shorter, the stock eventually rallied some more in the afternoon. We were committed to hold the position at least until the end of the day. Our initial target of RM1.18 had already been met; we didn't mind pushing this further.

As at 4PM:



And then, by 4:40PM:

We decided to exit even though the stock closed at its highest point of the day - chartists would consider this the bullish-ish-ness sign of all. Such price activity tends to lead to higher prices tomorrow, or a 'gap up'.

But having met our targets, we knew to count our blessings! We did not give a damn about gap up potentials or what your neighbourhood chartists say. Taking profits is far more important.

We outlined the risks much earlier; just minutes after we entered into the PRG position, in fact. Upon hindsight, it was an ominous warning of what's to come, as you will see...


Included the timestamp so you know exactly when we came up with this.

All things considered, the returns were anomalous in a good way. Not every day does this happen. 


ROUND 2

On 25 September, the stock did pretty much what most of us expected. It opened at a 'gap up', eventually rising to RM1.30 in the morning session.

We admit; we were slightly kicking ourselves for selling a bit early. But then we reminded ourselves that we don't have superpowers. There was no spider bite that suddenly gave us the ability to time peaks in stocks. Selling at RM1.22 instead of RM1.30; so what? 

We didn't have a spider sense to tingle us. But we did smell something funky. 

Over the two days, instead of being an illiquid counter (or a 'lousy stock to trade' as we'd usually call it), PRG suddenly encountered massive buying volumes queued at lower prices. We're talking about thousands of lots, which can be interpreted as a ready supply of buyers.

But the presence of buyers does not necessarily mean actual buying interest. Like Fat Joe on a boat, they can simply disappear when no one's looking. 

On this particular day, PRG peaked at RM1.30 and showed some stability at the RM1.27 level. Within minutes, all hell was about to break loose.

In a five-minute period from 10:15AM onwards, all the purported buyers disappeared. The support at lower prices - those big lots we mentioned - became no more than a mirage. And of course at this time there were a few opportunistic uncles and aunties who were chasing the rising stock. This was a rollercoaster - but it had stopped going up.

So we watched with curiosity as the stock staged a dramatic drop from RM1.27 all the way to 96.5 sen. How do we convey the magnitude of this move - 24% drop in 5 minutes! - other than with  facepalm and shrug emojis?

What the...

Look, this kind of thing does not faze us. We have seen this before - we knew that it could happen, and this time it did with a vengeance. In fact, if there's one thing that haunts as at night from trading - we usually sleep soundly - it's this very situation.

Those who had 2,000 lots of PRG at 1.27 for example, would be deader than dead when the stock immediately falls like this. The only recourse is to dump at any price, and we were willing takers.

Call us whatever you like : predators, bottom feeders, etc. We like to think of ourselves as the bringer of balance to the Force. Our small participation creates a little bit of liquidity for sellers to go into cash, mitigating potential further losses.

Our purchase records below clearly show that we had an idea to buy at the peak (trough?) of the panic phase. We even somehow got a bit at the absolute low of 96.5 sen for PRG. Remember that this stock was trading at RM1.30 barely an hour earlier.

The accumulation and exit phase did not last much longer than seven minutes. Realising that our targets were met. We chose to exit at RM1.10.



The full narrative as described in our members only Telegram channel:


Our final gross receipts weren't bad:




Well, we got our happy endings and whatnot. But the stock didn't peak at the point of our exit. It went up to RM1.27!


The 25 September stock price chart is a thing of beauty. 


The stock market can be extra crazy than usual sometimes. We try to do our part by tracking inefficiencies and pounce on them. But the most important thing to remember is; don't push your luck.


Accept the profits. Go to sleep.





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