Trading the Trend - One cup and handle entry

The bull run continues, and it’s the start of a new quarter. It is likely that you had a positive one, as Q2 2020 ranks in the top ten best quarters of all time. Therefore, if you didn’t have a positive quarter, it is clear that you were not playing the trend. 

All that fancy research from highly paid and super clever analysts, complex discounted cash flows to compute the fair value of the equity, statistical analysis of economic forecasts, may or may not have given the correct answer which showed itself in the charts. 

That is why I allow the chart and the trends it shows to reign supreme across all other methods, and why I will continue to say that even investors should consider technical analysis in their approach. I often look at the fundamentals of a stock when trading (though this is certainly not my strong suit), as does Mark Minervini in his trademark VCP, and can’t understand why anyone would deliberately shun one side or the other. My view is that I’m here to make money, and anything that will give me a legal edge in the market – I will use it. Why would you not?

I remain bearish on the economy, but long on stocks. So long as we see continued rises and stocks breaking out to new highs, I will remain net long. Whatever your view, I do hope that you and your family will remain safe, and that you will also have a positive quarter in the coming months. 

LoopUp

LoopUp is a stock that is classed as a “software-as-a-service provider of remote meetings”. So it’s similar to Zoom, only I’ve never heard of LoopUp. I did see it on an advert on the tube once, as it stuck out having already been aware of the stock, but everyone I know uses Zoom. 

Despite this, on 24 June 2020 the company announced that it was trading materially above pre Covid-19 levels. I asked one of my brokers to buy a chunk, but was told that I could only have half and that the market maker would work the rest of the order throughout the day. 

I said that I would just take half and kill the order, which is usually not a problem, but in this instance I was told it was market maker etiquette and that I would either need to allow it to work or not be filled. As the phrase “market maker etiquette” is a trigger phrase for me (if market makers are happy to screw private investors every day on the spread and show false offers and market depth on Level 2, then they have no right to be whiney babies in my opinion) and because I also don’t want to be having an order worked if the stock is going to fall, I decided to pull the order completely. This was at 138p, and in hindsight the wrong decision, but as a trader I want quick execution rather than being locked into a contract based on ‘etiquette’. 

However, each broker is different, and whereas my default order at one broker is an execute & eliminate (the order takes as much liquidity within the limit given and the rest of the order is pulled, or ‘eliminated’), it became apparent in future that I would need to specify this upfront. When joining a new broker, it is worth asking:

• What is the best process and instruction for the types of order that you usually and would like to do?

• In certain situations, such as profit warnings where you want to get out quickly, how will the broker get you out? Will they be willing to call several market makers? (Some brokers won’t, some will)

This will remove any future problems such as the one I experienced in LoopUp. I made an amateur mistake, as I’ve never had a problem with that broker, but I have now made a note of this when joining future brokers. This has cost me a good trade, and if you do this when you join up – you will hopefully not make the same mistake as me.

Here’s a chart of LoopUp.

It did fantastically well, delivering multibag returns (the best kind of returns) and peaking at 500p.

Let’s take a look at LoopUp from 2019 onwards.

Again, as we see in many of these charts in the columns – the warning signs were there for holders. A rounded peak, the stock trading below all moving averages, all moving averages pointing downwards. 

We can see there was a big gap down last year due to a profit warning, and if we look closer we can see why I traded this as I posted on my Twitter.

Both volume and volatility dropped right off, and the stock had fallen without rallying. I took a long position, with a stop underneath the low, and waited for the next month. It’s always worth trading the oversold bounce but don’t stick around and overstay your welcome.

Cup and handle trade

However, LOOP now looks an attractive trade. It’s presented a nice cup and handle, and I now hold a long position.

We can see a ramp up in average volume from May onwards, with May’s average being several times higher than April’s and the strong volume days continuing in June. 

This tells me that we could be at the beginning of the trend. If we look prior to March, volumes were thin and volatility was non-existent. But now we have the stock moving freely with clear interest. With the stock trading ahead of expectations, this could see market participants continue to bid up the stock as well as technical traders and trend followers coming on board. 

Gaming Realms

Last week we looked at Gaming Realms, and the stock has now broken out on very good volume. I hope that this will be the start of a new stage 2 trend.

The stock has moved up from around 5p in just a few months, so it will inevitably need to take a breather and consolidate as many of these stocks do, but so long as the trend is in my favour I will continue to hold. 

You can download your free copy of Ten Habits of Highly Profitable Traders from Michael’s website at www.shiftingshares.com 

Twitter: @shiftingshares