Don't be bored by stocks which go nowhere

Tuesday, Mar 03 2015 by
7

It is tempting to dump stocks that move sideways for a couple of months, assuming that they have nowhere to go. You just become bored with the stock.

Such an attitude may not be a productive one, though. Looking for stocks that have done nothing may be beneficial. I am referring to stocks with a market cap of say, at least £100m, maybe £150m. I exclude very small-cap stocks from this behaviour.

An example that springs to mind is Redde (LON:REDD). It recently reported its interims, sending the shares up 20% over 2 days. Prior to that, the shares had been consolidating for a couple of months, as you can see from the chart below.

redd

I had previously seen this chart pattern before in RGS (Regenersis), which paused before its continued upwards ascent. The prior trend may continue, or may reverse. You have to make your own judgement based on fundamentals. SGP (Supergroup) was a company I invested in at the time when the market had dumped them due to their logistic issues, and a period of consolidation followed. The company then issued a bullish trading statement, and the shares rocketed.

Trading statements seem to be what often trigger re-ratings. It happened in all three companies I mentioned. The shares seem to “mark time", as the market was looking for information in order for it to make its next move. The trick is, you've got to buy before a major move, not after. You also need to consider valuation levels and whether you expect the story to be positive or negative in order to know if it's a buy, or not. If you had looked at REDD, for example, it had a Stockopedia value rank of 75. Positive news was also building in their RNS releases, so if you had bought, say, in mid-February, you would be sitting pretty. You probably would have seen your purchase in an initial loss, though. Sometimes you have to be a bit patient in order for your ideas to work out.

Note that when a share does make a move, it tends to either be overbought or oversold. You can see in REDD, for example, at the start of its latest consolidation, the share price was well above its 50dma. Investors might therefore want to think about…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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Redde plc is a holding company. The Company is engaged in providing non-fault accident management assistance and related services, fleet management and legal services. The Company offers a range of motor claims accident management services, including vehicle replacement and repair management together with full claims-handling assistance, as well as legal and other personalized services. The Company manages its own fleet of approximately 7,000 vehicles and has access to over 50,000 vehicles through selected rental partnerships. It also provides specialized large fleet accident and incident management services through the FMG group of companies with over 300,000 fleet vehicles under management. It provides accident management services from operational call center sites in Peterlee, County Durham, Huddersfield and Croydon, as well as solicitors' services through Principia Law Limited from Northwich and NewLaw Legal Limited from Bristol, Cardiff and an associated office in Glasgow. more »

LSE Price
100.8p
Change
-0.2%
Mkt Cap (£m)
309.8
P/E (fwd)
7.6
Yield (fwd)
12.1



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12 Comments on this Article show/hide all

PhilH 4th Mar '15 1 of 12
2

Hi Mark,

Ichimoku Charts can help with this too.I've included the Redde chart below and at no time does the share price fall below the clouds (which would be a sell signal).

Not however that this chart is slightly complicated by the fact that there was a share split (?) in early June 2014. The effect of that washes out by mid September 2014

54f6c1756ca58Redde.png

Hope that helps

Phil

Professional Services: Sunflower Counselling
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underscored 4th Mar '15 2 of 12

Hi Phil, do you mind expanding on how you work Ichimoku charts into your stratergy?

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PhilH 4th Mar '15 3 of 12
2

Hi underscored,

Please take a look at Ichimoku Trader for more information on the charts.

Basically the idea is that charts can either be bullish, bearish or consolidating and you an tell that in an instant. Consolidation points serve as points of support and resistance. The longer the period of consolidation the more the bulls and bears have fought over the price and as a result one is more likely to encounter support or resistance at these points

The chart is constructed with a standard Open High Low Close chart, then various moving averages are laid over the top. Clouds are formed using the combination of a fast moving average and a slow moving average. The clouds are crucial in understanding the trend, support and resistance. There is also a trailing price line which can be used to indicate the extent to which the price is running into consolidation.

When my screens highlight some stocks I'm looking for charts where the price is above the cloud, is climbing and ideally breaking new territory, e.g. Paul highlighted Vislink (LON:VLK) to day and a move above 50p would be bullish as this has been a point of previous resistance (these are called shadows in Ichimoku land). I also use Point & Figure charts to generate price targets and use those with stop losses to calculate the risk/reward for each play.

If I choose to buy a stock then I then use the charts to monitor stocks and to select optimum stop loss positions, shifting them up as the price increases. Once a stock is up and winning I tend to monitor with a 10% stop loss on my spreadsheet. If a stock gets close to triggering that I go back to the chart and make sure that the stop loss is below the cloud and that the price has actually given a sell signal. Painful as taking a loss is I try not to get too attached to a stock and it's story and I sell if the share is performing poorly. The only exception to this has been where there has been a market wide sell off and in that instance Iv'e sat on my hands and waited for the dust to settle and then given all of my stocks the chance to recover.

Not sure if that helps.

Phil

Professional Services: Sunflower Counselling
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underscored 4th Mar '15 4 of 12

Thanks, that is helpful.

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Edward Croft 4th Mar '15 5 of 12

Mark - Redde has a classic stepwise 'box' chart as discussed by Nicholas Darvas in his classic "How I made $2m in the stock market" - have a google for "Darvas Box Theory".

He was a dancer... used to get telegraphs of stock prices... used his box theory very effectively. It's basically a momentum breakout strategy... much mimicked, rarely beaten.

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Paul Scott 4th Mar '15 6 of 12
2

Hi,

It's a tricky one this. I bought Redde (LON:REDD) when it was HelpHire, because it was stonkingly cheap after the restructuring at 3.5p (in old money) see my report of 20 Jun 2013.

It did very well, moving up to about 80p, at which point I just thought it looked fairly valued, and as you say, the shares were trading sideways, so it looked as if there was little upside from there, so I sold in order to free up some money for a new stock idea which looked cheaper.

Then the company published fantastic interim results recently, and I bought back in at 104p on results day, as the facts had changed to such an extent that it seemed likely to have further legs in it. I was mindful of what Ed said at the seminar last week, about being prepared to buy on upside chart breakouts, if the newsflow is strong & justifies such a move.

So all well & good with REDD. But we're looking at this with the benefit of hindsight. My question is this - if a stock has risen a lot, and now looks fully valued, why would you continue to hold, if you can find other stock ideas that look under-valued?

It's fine after the event to say that was the right thing to do, because the company surprised on the upside with profits, but we don't know that at the time we have to make the decision on whether to continue holding a stock that at the time looks fully valued.

I'm sure we could find just as many charts which show that selling when a stock reaches a full valuation is also a great strategy, as you lock in the profit, and avoid a subsequent plunge in price when something disappoints.

Regards, Paul.



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iwright7 5th Mar '15 7 of 12

In reply to post #93718

Ed - I have just finished reading the Darvas book and was impressed with his momentum story. I have looked for UK software using UK tickers that will automatically draw out the boxes (to avoid my bias), but cannot find any. Does anyone know how to source decent online software, preferably without having to download the data and use Excel? Ian

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rick 5th Mar '15 8 of 12
1

A Darvas box is to some extent subjective but is based on recent support and resistance (highest price = resistance / lowest price = support, over a given time period). I think Richard Donchian was the one that systematized it with his Donchian Channels (20-day, and 55-day commonly used by the famous Turtle traders trained by Richard Dennis). You can plot these on bar/candle charts on the Stockopedia charts. A breakout to a new high is bullish (conformation of the establishment of a new upward channel (i.e. similar to a breakout from a Darvas box) and a breakdown bearish.

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iwright7 6th Mar '15 9 of 12

Phil - Am interested in the Ichimoku Charts and have ordered a book called Cloud Charts to learn more. Any other good sources of information please? How often do you refer to them - Before buying/weekly review?


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PhilH 6th Mar '15 10 of 12
3

I just want to rewind a little ...

It's important that you understand that I'm not a pure chartist. I have been ... unsuccessfully ... however since using Stockopedia I undertook a period of research into their guru strategies. I examined them to find a system that returned a reasonable selection of stocks with a great return. The system that leapt out with smooth and consistent growth was The Naked Trader-esque strategy. I read the book and Robbie's strategy really appealed to me as it was a simple, easy to understand approach. He looks for high quality companies that are cheap and exhibiting something that will drive the price, e.g. new products, new territorties, new deals, etc. I personally add in extra checks around bankruptcy risk, plus I'm really looking for cheap growth to drive the price, so a key feature for me is a low risk adjusted PEG (this is how I find value). Once he's found these stocks he's looking for stock in an uptrend and ideally with a price breakout into clear territory and this is where the Ichimoku Charts help me. They also help me pick where my starting stop loss would be placed. I also use Point n Figure charts to generate price targets. I then use the price targets and stop losses to calculate risk and reward. I prefer a risk reward ratio > 3.

What I want people to notice is how far down the stock picking chain the charting techniques are for me. I really want to emphasise that in my stock picking they are a tool for monitoring price momentum and trend. They also give clear buy and sell signals which can strengthen the case for buying and tell me when to sell.

I try to monitor my spreadsheet every night to assess if notional stop losses need to be adjusted up or if stocks are close to breaching the stop loss. I should explain that I tend to just set a notional trailing stop loss of 10% in my spreadsheet to warn me when things are afoot and so when it's breached I take a closer look and assess if the stop position is sensible given the look of the Ichimoku Chart, e.g. usually I'll be looking to place a stop loss just below a bullish cloud as the cloud often provides support for the share price (particularly if the cloud is thick as this means there has been a big battler between the bulls and bears at this price level). If the chart has issued a Strong Sell Signal, e.g. price broken below a bullish cloud I'll sell out and move on.

Paul recently posed the question "if the stock becomes fully valued why wouldn't you sell?" ... So I could potentially sell my selections when the risk adjusted PEG rises above a threshold (not sure what value I'd choose though) however my view is if I'm selling a product in an auction and I have a price I think it might achieve I wouldn't stop the auction if two bidders went banzai. OK, so selling shares isn't like an auction as the price can drop but you get the picture. I prefer to let the market decide what my stocks are worth and I'll ride that wave until it starts to die. Ichimoku Charts help me time that process. In the main I'll miss out on 10 - 20% of the initial move by waiting for the breakout and 10 - 20% off the top as I wait until the trend dies but I'm looking for the big move in the middle. Some stocks won't continue the breakout and I'll cut them when the charts indicate the trend has changed. I know that not all of my selections are going to work out and that helps me to become less attached to them and so it's easier to sell them. I'd never talk to a CEO and I try not to be swayed by other posters. I'm taking complete responsibility for my selections and I encourage you all to do the same.

If other opportunities come along with a better risk/reward profile than my holdings then of course I'll assess if it makes sense to switch riders but that is a nice position to find one's self in and great opportunities are a little thin on the ground at present. Plus I don't want to over trade my portfolio.

With respect to books, I think I got a lot of my knowledge about Ichimouk Charts from Trading with Ichimoku Clouds: The Essential Guide to Ichimoku Kinko Hyo Technical Analysis by Manesh Patel. I read the book not to develop a trading system but rather to learn the principles behind that approach and the details of how the charts are constructed so that I could build my own charting software (I'm a former software engineer). Again what I'm trying to stress is that they are a small part of my approach rather than the system.

Not sure if that helps.

Best of luck
Phil

Professional Services: Sunflower Counselling
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iwright7 6th Mar '15 11 of 12
1

Phil - Thanks for the detailed reply and I now understand that these charts are a small part of your investment choice. I have never used charts, (except simple up/dawn momentum) and looked at Ichimoku charts the 1st time this morning using your link. There is a Youtube video that I found good to give me a flavour: https://www.youtube.com/watch?v=Y9QM8WRRWzE . The trending principles make a lot of sense to in relation to momentum movements so that is what I am going to study up on.


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Amanda Heron 6th Mar '15 12 of 12
2

In reply to post #93967

I like your strategy Phil. I investigated Ichimoku Clouds a few weeks ago and found some really good sites on You Tube. One of the best explained was Ichimoku Basics for the Beginner by ChaosTrader63. There are many others. I also learnt a lot about charts from StockGoodies.com and the ZigZagMan, who has to be one of the most patient teachers around.
Hope that helps.
Amanda

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About Mark Carter

Mark Carter

I am a private investor living in Scotland. I am a computer programmer by trade.

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