Trading the Trend - two stakebuilder ideas

The market sold off this week only to rally into the close. When an instrument prints near the high of the day at the close, this tells me two things. Firstly, the market is bullish (at this moment). And secondly, those holding long positions are bullish enough to take the overnight risk. Over a Bank Holiday weekend, the close is even longer. 

What does this mean for the long term? Nothing. All we can gain from this is that in the short term the market is long. 

It’s important to remember that everyone’s timeframes are different here. You may be a long-term investor, or you may be a trader – either way, it’s possible for two people to have a completely different opinion and both be right because their timeframes are different. 

An intraday trader only cares about the trend within that session. A swing trader may only care about the trend for a few days or weeks. A long-term investor may not care what price they buy at now because they’re confident in their analysis that in three years the price will be much higher.

There are often arguments on Twitter about various stocks. Very often these can be settled by acknowledging the time frame is different. 

Over a long enough time frame, I’m a perma-Bull. I believe that no matter what happens in the UK, companies will innovate and build value for the shareholders of those companies. Despite the pandemic that is sadly going to continue to plague the country, life will go on. In the fullness of time markets will be higher. 

For a trader, it’s important not to get too attached to any opinion. With increased market volatility comes the increased likelihood of finding oneself offside on a position. It is much better to be wrong and keep your money rather than stay wrong. 

I’m net long at the moment, though it is possible to be short in an uptrending market if you’re short the right stocks. However, in a market bounce the best trades can be long trades as we have seen with WMH (mentioned earlier in this column). 

I’m on the lookout for shorts, because my opinion is that we see another leg down at some point. I thought that last week though, and instead I found myself getting longer over the week. This is likely going to continue until my stops are hit and I start to see more short setups and breakdowns. 

M&C Saatchi plc

M&C Saatchi (LON:SAA) is on my radar as it has that pattern I like to see – a cup and handle that had broken out on good volume. There was also a huge volume spike, which is clearly a buyer taking stock from a seller. 

On Tuesday morning, it was announced via RNS that Vin Murria and family had taken a 13.25% stake in the business. That’s a large amount, and I assumed that the market would believe that she had a plan, and so I bought and immediately got on the bid. The stock has ran up 40% since then so I took the opportunity to lighten up, and how the stock reacts next week will determine if the stock goes on a further run or not. 

I have read that “Reports speculate that Murria would remove David Kershaw, 66, the chief executive, and other veteran directors”, although it wouldn’t surprise me if the newspaper had made this sentence up and claimed it as a “report”. 

Looking at the chart above, we can see that the stock has been trading underneath the 50 EMA since last June. It has come close twice to tagging it, but only this week has it crossed the black line. This is significant to me, and so perhaps along with the catalyst of Vin Murria the trend may be changing. 

I did see a comment on Twitter about the board buying recently, and so I decided to check this for myself. I don’t rely on director buying for trading, but it is nice to know if they’ve put material amounts in.

Here we can see three board members put in £331,012 each a few months ago, with chief executive David Kershaw buying another £100,001 in December.

However, he did sell £3,048,909 in 2015. I don’t regard his recent buys as conviction buys. If he thought this business was worth double – wouldn’t he put more cash in? Who knows

Ince Group plc 

This is the old Gordon Dadds. I’m generally wary of a stock that changes its name – usually because there’s a negative reason for doing so. I don’t know if that is the case here but I’m reminded of Sula Iron & Gold (SULA), which become African Battery Metals (ABM) in 2017, and Power Metal Resources (POW) recently. I wouldn’t be surprised to hear if it was due another change this year. 

Anyway – I digress. Whether or not Ince Group is a fundamentally good stock or another piece of AIM garbage doesn’t matter. What does matter is the chart, and I have started building a position at 23p and 24p. 

Look at how a few weeks ago the volume spiked, and since then volumes have consistently been higher than the average. Volatility in the stock has increased too, and we saw the biggest volume day in the stock’s history on Wednesday.

I think 30p will naturally show some resistance, as it’s a round number and buyers here will be nicely up in their positions. FMR LLC went below 5% on 6 April, and I assume it’s FMR who are providing the supply to the market. Who the stakebuilders are remains a mystery for now.

Directors are also net buyers here too, around double the current price, taking up their rights shares. 

The recent placing raised £14 million in gross proceeds for the company, which is currently now capitalised at £17 million.

There is no guarantee that this trade will come off, but to me the risk/reward appears to be in my favour and so I’m happy to play it. 

I’m happy to run a wider stop here, and I wouldn’t want to be in if the stock took out 21p. Capital preservation is always key. 

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

Twitter: @shiftingshares