Trading the Trend - three trend trades

Happy New Year – and Happy New Decade!

The world is an incredibly different place now than it was at the start of 2011.

Back then, Bitcoin was weird computer money for nerds. Now it prints around $34,000 per coin.

Amazon stock traded around $200. Now a single share is around £3,200.

Ten years is not a long time yet so much has happened. Just 20 years ago the internet was not taken seriously – but children growing up today don’t know life without it.

It’s possible you remember checking share prices on Ceefax and – if you were around in 1987 – knew the feeling of watching yourself lose lots of money but not being able to do anything about it because the brokers weren’t picking up their phones.

But some things do not change.

In 2020, many brokers failed to perform online when volatility spiked – and still didn’t answer their phones.

This is to be expected in future too if you’re an AJ Bell client – as Andy Bell warned that clients “should not expect to trade instantly at all times”.

Other things don’t change either. Lots of people are calling Tesla a bubble – but the fact that people are calling it a bubble means it’s clear that there are a lot of people left to buy.

If everyone already owned Tesla then nobody would be calling it a bubble.

To be clear: I am not saying that Tesla will go further from here (I don’t know what the price is or care). I’m also not saying that Tesla will go down from here.

The truth is – I don’t know. If I knew, I’d put the trade on! It’s simply an observation which, so far, has made sense. But that can change any time, because nobody can accurately call the top.

One book I recommend reading is Reminiscences of a Stock Operator by Edwin Lefèvre. It talks a lot about trading psychology. There is a lot of wisdom in here – but the quote I often recall when looking at big moves is this one (emphasis mine):

“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth-or the first. These two are the most expensive eighths in the world.”

I think we are at the beginning of seeing many stocks making their moves. Many stocks have already doubled from their lows – so we may have missed the first eighths – but there are plenty more!

There’s always a reason to worry, but with the vaccine now actively being rolled out there is a catalyst for earnings to grow again. Here are a few stocks on my watchlist.

Surface Transforms

Surface Transforms (LON:SCE) makes carbon fibre brakes.

This company has been a dog for years. It may be that the stock was a previous company before but if the company has actually been listed since 2001 then it appears it has been an entire two decades now of misery for shareholders.

However, there are green shoots starting to appear. This also reflected in the recent stock price strength.

Look below, and we can see that in September there was a big volume spike and a big green candle.

This momentum has been sustained with the stock consolidating for several months.

The company has contracts with several OEMs for its brakes, and I’m told by management that these brakes are difficult to reproduce. They could be lying, but the chart certainly isn’t. There is a growing interest in this stock. This is easy to deduce because if there wasn’t then the price would be falling.

The company has also financed itself sufficiently, with a placing and open offer. Shareholders were offered 1 share for every 58.97624813 Existing Ordinary Shares held at the Record Date. All a bit silly, isn’t it?

It’s a shame the company couldn’t have offered their shareholder register a better deal given the company’s failure to deliver anything other than director salaries so far, but most companies don’t even bother to do open offers. In that respect Surface Transforms could be considered forward looking when it comes to caring for shareholders!

With a placing, and growing momentum in the business, I’d like to get onboard the trend if the stock can break out of the 54p range.

Ideally, I’d rather the stock consolidated and created higher lows before breaking out, as it means I can then size the position up and reduce the percentage of my stop. At the moment, the recent low is around 43p – which would mean my position would be greatly reduced to take into account the wide stop.

Let’s see what happens.

Audioboom

Audioboom (LON:BOOM) is another historic dog share which may be seeing improvements.

What has caught my interest here is the interest from directors. They usually only ever buy for one reason.

The chart looks like it could be bottoming out too – it looks like a potential stage 1 base.

The chart looks like it could be bottoming out too – it looks like a potential stage 1 base.

Looking closer, the stock has struggled to take out the 280p zone.

Audioboom claims that it’s now funded for growth after a premium placing at 225p. It’s a growing sector. Debtor days are coming down to improve cash flow, and cash burn is also reducing.

It’s still unprofitable so it’s speculative of course – but this would be a trend trade based on improving fundamental and technical strength.

Totally

(I hold a long position in this share)

I am not management’s biggest fan here but again this is a trade.

To fit the theme of bad stocks of this article – you guessed it – Totally (LON:TLY) has also been a dog. It has diluted shareholders several times to make large empire-building acquisitions.

However, towards the end of 2019 interest has started to grow in the stock.

The company has turned profitable (before tax), is well capitalised, and is now paying a dividend. I am long through the breakout at 22.5p and intent to add to this position if it breaks through 26p.

We can see also the stock has tested the 200 moving average several times but each time has been bought and bounced. This is another bullish indicator and tells me the stock is uptrending. It’s also over 100% from its lows too which is something Mark Minervini looks for.

These stocks are never going to be the quality compounders I feel – but for those looking to capture a trend I think they could be good opportunities.

Finally, this is my last column for Stockopedia and other columns. I’ll be writing a monthly newsletter for my subscribers (free) on my website and focusing on trading.

As I’ve said above – I think 2021 has great potential.

I hope it’s kind to you in health, happiness, and prosperity! I’ll still be around in the SCVR and other articles, and you can also follow me on Twitter.