Trading the Trend - a cup and handle play

France has been added to the list if UK quarantined countries. Airliners took a hit on the news today, with Dart, easyJet (although there was an RNS this morning about leases), and IAG down. 

I was surprised that Greencore also didn’t respond to the Coronavirus headlines of workers being infected. I shorted some on the bell and closed within minutes as it was clear there would be no quick reaction. However, I have since heard that the news was out before the close yesterday so this makes sense. I did a quick Google and the headlines were showing 12 and 13 hours ago at 7am this morning, however I realise now that is probably when the article was last updated. 

Therefore, if trading from news articles, it makes sense to check when the story first broke and not when it was updated. 

There is a lot of positivity around the Eat Out to Help Out 50% off scheme. I like eating out anyway, and I like to think of myself as a good person and so have tried to take advantage of this and support the local economy. ‘Tried’ being the key word – it is almost impossible unless you pre-book a table beforehand. 

This is all good news for the month of August, and great for businesses getting bums on seats (although I am surprised that many seem not to have opted in. Why? Sharing too much information with the government?) – but here’s the problem with discounts: people generally don’t like paying more for the same product/experience once they’ve had it. 

In this instance, prices of food and non-alcoholic beverages will double in September on Mondays to Wednesdays. So, people who have enjoyed a month of 50% off or saving £20 will now see the prices dramatically rise for the same food and experiences. I would be willing to bet the Monday to Wednesday trade will take a hit. 

How many businesses have suffered from discounting? Hornby (LON:HRN) , Restaurant (LON:RTN) , Superdry (LON:SDRY) ... There are likely to be many more, because discounting creates addicts. 

I haven’t checked the charts of hospitality and pubs recently, but there may a trade in them. 

Purplebricks 

Purplebricks is an online estate agent, which has been both a success and an absolute disaster for shareholders. Here’s the chart since the company’s IPO in December 2015 to the start of 2019.

If you were in at the IPO and you sold a few years later, then it’s likely you had a multi-bagger. But if you bought in the autumn of 2018 and held until now it’s likely you had what I call a reverse-bagger. 

In this chart we can clearly see the four stages of a stock in play. 

To the left, from 2016 until early 2017, we can see stage 1 where the stock is trending sideways and in a base. The stock then breaks out and enters the accumulation stage, or stage 2, where institutional investors push the stock higher. We can see that the volume increased too. 

From September 2017 we see a crescendo of volume, and some of the moving averages pointing downwards. The stock failed to make a new high marking the stock as a potential stage 3 stock, where institutions begin to unwinding positions, and this was confirmed when all of the moving averages began to point downwards and the stock traded in a stage 4 downtrend. 

Being able to identify which stage a stock is in can help you to trade it. Normally, I like breakouts and cup and handles in stage 2 stocks, but I’ve had success trading cup and handle bottoms. Many gurus would be quick to tell me this is wrong – but if something works, then you should absolutely keep doing it. There are many ways to make money in this business and no way is the right way. 

This is the Purplebricks chart now. 

The share price is well off its lows, and it has built a cup from March to June, and has since struggled to break out until now. Note the increase in volume from the end of May onwards too.

I’ve heard various reports of Purplebricks. Some have paid the commission only to find out that their agent bothered very little with them afterwards, and some have said Purplebricks was the best agent they have ever used. 

In the recent results, the company has abandoned its disastrous Canadian venture. It amazes me that a company that was struggling in the UK thought that it was a good idea to expand somewhere else. Generally, a cookie-cutter approach requires one to have a working cookie-cutter before you bake more cookies. 

There were also some sizable buys from independent directors. I’m also not sure how a £250,000+ director buy means you can remain independent, but certainly nobody put a gun to his head and forced him to buy. 

I am currently long Purplebricks, and I’d like to see the share price retrace, form a base, and then add to my position on the breakout. 

If we look closer, we can see that volume has clearly been higher on the up days, which can be see in the green and red bars – aside from the obvious big red bar in June.

If we look closer, we can see that volume has clearly been higher on the up days, which can be see in the green and red bars – aside from the obvious big red bar in June.

The stock is also breaking through the 200 moving average. If it holds, this would be a first since July 2018. 

In the below chart, I’ve drawn in yellow where the stock has tested this, and failed each time to break above and hold. If the price can hold this time, then I’d consider it another bullish signal that the trend is now upwards.

Can Purplebricks come back from the dead? Who knows. But if it’s going to trend upwards, I’d like to be able to ride it some of the way at least. 

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