Trading the Trend - two under the radar breakout plays
Lockdown continues – and hopefully the volatility too. For the last few weeks, I have seen only my screens, my gym, and my bed. Last week’s highlight of AA. carried on rising nicely, and other stocks have been moving quickly too.
I also made some progress on finding stocks that may be worth going long on even in a falling market. Mainly because one of them showed themselves to me in the form of an RNS.
The hour between 07:00 and 08:00 is the most important hour of a trader’s day. This is when the RNS feed begins running, and the trading day properly begins. Results, trading updates, contract wins, bookbuilds and placings, and directorate changes all begin to appear. Many of these contain tradeable information.
I make it my goal to eyeball every company name and title of the announcement, in order to quickly make a judgement whether it is worth opening. If it is – and the information contains something that may move the price – I write it down and continue my search.
Once I have various RNSs, I then plan my trades. For example, Learning Technologies (LTG) announced a good RNS yesterday stating that the “Current financial year has started well and is in line with management expectations; we have not yet seen a material impact from the ongoing COVID-19 outbreak on our performance”.
Looking at the chart, there was plenty of supply in the market the previous day. It was possible that the market had priced in a downturn and so this news could mean a potential rebound was on the cards.
Unfortunately, in the early minutes of trading selling pressure pushed the initial rise back, and there were plenty of AT trades selling – so I hit the bid and took the loss.
The price continued to slide, and this is a good example of why cutting losses quickly is a good trading skill to have. The first cut is always the cheapest. I don’t have a problem selling, because I can always get back in. Holding a loser because you want to get back to breakeven is ego trading.
Another reason why getting into the habit of keeping up to date with RNS announcements is because you build your own mental database of stocks. You get to know them, how they move, what they do, potential changes. You’re able to respond much quicker than if you were getting to know the company first time.
Intercede Group is a company that had down as a potential turnaround for years now. And finally, it appears it might actually be turning around.
This is from an RNS last week “The combined effect of increased revenues and ongoing cost control is expected to result in increased profits that are substantially higher than market expectations and the previous financial year.”
Any company that is not being crushed by Covid is doing better than most. And whilst these results are historic, the company said: “A few delays were experienced with the receipt of orders and project upgrades that had been scheduled to take place in the last week of March, but they are all currently expected to proceed in the coming weeks.”
It sounds as it current trading is not hugely affected (yet).
Looking at the chart, Intercede is moving up nicely.
It gapped up and saw some selling on the day of the RNS (the big red candle a few days ago), and last week the CEO bought 15,000 shares. This is only just under £7,500 so it’s a token buy, but it is a buy. One doubts he would be buying at all if he didn’t think he would make money as nobody is forcing him to do so. We can see that selling pressure closed the gap and since then the stock has been on the move.
I hold a long position here since the trading update – so I’m talking my own book here – but one thing I’ve always found interesting about Intercede is that it has a gross profit margin of 99%+. From the last results it was 99.8%. Operating expenses have been coming down, and this pushed the company into positive operating profit and shows that any contractual wins can scale the business upwards.
Let’s look at the longer term chart.
The stock tested the 200 moving averages and bounced off these, continuing the uptrend.
I want to add to my position if the stock can break 55p, and add again if it breaks the 52-week high at 64p. My opinion is that this is an early stage 2 stock, and if the stock is going to trend I want to be riding it.
Another stock that has caught my eye in recent weeks is Shearwater Group. This is a stock that has been hammered in 2018, and traded rangebound since then.
The directors have sunk large amounts of their own cash into this business, and so when directors are heavy buyers it makes sense for me to take notice.
You can find recent director dealings on Stockopedia by clicking “Accounts” and it will be in the dropdown box.
Remember, nobody forced any of these directors to buy. But there’s always a reason to sell!
“Institutional demand” is my favourite. It’s amazing how AIM is full of kind-hearted generous directors who altruistically give up the upside on their stock for institutions. It truly is a wonderful market filled with generosity.
Here’s what I’m looking for. I want to see the stock make a decisive break out of twice-tested high at just over 275p.
I haven’t checked the accounts of SWG to see if it is making money or not, as it’s not hugely important to me. I know there is a possible reason to buy due to the directors, and so I’m happy to test my thesis in the form of a long trade should the price do as I hope. If not – I will remain a non-shareholder.
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35 comments
Hello Micheal,
Very interesting thread and I'll be reading your website and articles there, which may answer my questions, however if you wouldn't mind answering here:
Do IG provide the level two for you & do you have to pay for it?
Do you use trephine broker to buy & sell your position, or online when selling, or always phone?
I think, you are buying physical stock, so no leverage, why do you not use spreadbetting or CFD's, or do you ?
If you don't use set steps, are you watching the screen the whole time you have the trade on?
Thankyou Micheal
I guess the positive with Shearwater (LON:SWG) fundraise is they were looking to raise a minimum gross proceeds of approximately £2.5m and have ended up with £3.75 million (before expenses).
So it hit your £2.75 target yesterday Michael. Very nearly bought, but held off as it raced to £2.90. Good little trick that of mm's and then the placing news this morning at £2.40. Why they didn't do the placing overnight like everybody else I can't imagine. £2.5 million doesn't strike me as a huge war chest if that is their intention. They have said it is the directors intention to take part in the placing up to £250,000. All very specific. Gone are the days when company solicitors advised 'saying as little as possible and preferably nothing.' Think I'll hang on now to see how close to the placing price the sp gets.
What's the best place to read or service to subscribe to receive the daily RNS?
London Stock Exchange’s own site
https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html
Investegate used to have a good site that categorises into RNS type, but has become unreliable in the past year.
Whats wrong with right here? If you use the folio facility with your stock in it. its tailor made.
Hi,
I really enjoyed the article but have a bit of a knowledge gap. I was wondering if anyone can clarify what is meant by stage 2 in the comment below?
“My opinion is that this is an early stage 2 stock, and if the stock is going to trend I want to be riding it.”
http://thepatternsite.com/Stag...
I think it’s re mark minnervini’s work
Oh didn’t see earlier reply , clearly he adopted it!
Excuse me for my lack of knowledge but what does RNS stand for ?
it stands for regulatory news service
Michael, thanks for your article.
Interestingly I have positions in all 3 companies in your article, roughly 11% of my portfolio in LTG, 5%-6% in both Shearwater and Intercede. I like companies with excellent management and high growth potential in technology and cyber-security, often about to become profitable.
Shearwater Group (SWG).
The director buys were not at a discount as Chip50 says but at the full price - there was a consolidation 100-1. They were also large buys for a small company whose directors are not likely to be well paid. These director buys are IMO highly significant.
I have met management and they are highly impressive.
You ask about profitability, from April 3rd update:
"Reported unaudited underlying EBITDA1 is expected to be in excess of £3 million compared to a loss of £1.4 million in the prior financial year, with the Group posting its fourth consecutive quarter of profitable growth. Good cash generation in the period has resulted in an unaudited cash balance of £3.0 million as at 31 March 2020."
David Williams, Chairman of Shearwater:
"Operating in the cyber security sector, we are well positioned to benefit from one of the most certain growth areas; as for us, there are now three certainties in life - death, taxes and cyber-crime."
Intercede (IGP) also operates in cyber security.
Also another very exciting opportunity as you outline which has just turned profitable, which may be on the cusp of a decent move up. It has a highly impressive list of clients including the US Federal government.
Learning Technologies has been performing exceptionally well and would have risen substantially on release of its results had it not been for the present strange environment and already on a PE of 25.
Thanks for that info. I don't hold any at the moment but I'm considering. I notice there was a director sale today at Learning Technologies (LON:LTG), also an option was sold, are you comfortable about these?
Shearwater (LON:SWG) placement at 240p, could have been better priced? Will watch the share price movement next week.
I had a look at Shearwater (LON:SWG), it is indeed loss making. Re directors buying, did you not notice that all but one of the buys is at a very large discount around 99%, yes no one is forcing them to buy but I think most people would at those discounts if they had the chance. Also how can the company give away so many shares, aren't the other shareholders heavily diluted, the directors must hold most of the shares as well. All seems a bit odd to me, I won't be buying any.
there was a 100:1 consolidation.
Shearwater Group plc (AIM: SWG, "Shearwater" or the "Company") today announces that on 25
September 2019, Wentworth Limited, a company in which the Chairman, David Williams, has a
beneficial interest, purchased 5,000,000 ordinary shares of 1 pence each in the capital of the Company
(“Ordinary Shares”) at a price of 1.70 pence per share. The Company also announces that VJM
Investments, a company closely associated with the CEO, Phil Higgins, purchased 5,000,000 Ordinary
Shares at a price of 1.72 pence per share on 25 September 2019. It is noted these purchases were
completed prior to the share capital consolidation of 100 to 1 which was effected on 26 September
2019.
The Company makes the following disclosures in accordance with article 19(3) of the Market
OK thanks for explaining about the share price, I was not aware of the 100:1 consolidation. So that does change matters, I will have another look.
Agreed Chip50. I just posted a reply also.
Hi Michael, I see your reasoning with Intercede but I am cautious of the liquidity of these micro caps. From Friday Level 2 there are 38 trades showing and the NMS is 1500 shares, trading on SETSqx. Admittedly there were a few reasonably large trades above the NMS but the biggest showing was 15,000 shares = some £8000, and this is on a rising chart. What happens if the share reverses and you want to get out? My experience is that it then can be difficult to get a Market Maker to quote online and the only alternative is to phone your broker who I understand can get a quote at NMS, but at what price - bearing in mind that in CETSqx the Market Makers control the price? Do you take your holdings much above the NMS as, if not, it's difficult to earn sufficient reward out of these illiquid shares.
Hi GN - yes, shares like this are illiquid and to trade you can't deal in huge size.
I mostly trade SETSqx stocks with my phone brokers because at least then you're guaranteed to get NMS plus the MM will deal several times over NMS because they want to keep favour with the broker.
I take my holdings above NMS as I can always chunk the order if I have to.
These shares move more but you have to position size less. Ideally, I'm looking for a larger move with IGP as you can't scalp a stock like this as you'll get impaled by the spread!
Thanks Michael for your outline of how you find, think about and execute trades. I have only recently come across your writing and find it extremely helpful. It is easy to read Minervini but not so easy to adapt his techniques day to day so much appreciated.
Hi Scarletblue
I'm inspired by Minervini too and trade using his system. You can build his trend template in Stockopedia which he uses to identify companies that are building attractive bases with the potential to breakout. The only criteria you will unfortunately not be able to implement is Relative Strength (RS). The RS Mark uses is proprietary to IBD and is found in their trading software. This indicator I find invaluable, but is very different to the RS indicator found on other trading platforms. Reading his twitter feed and listening to his interviews is also very educational because he will often tell you when he has taken a position in a stock. You can then bring up the chart and analyse. I've found this very helpful.
Great to hear Scarlet! You might find my breakout guide useful from my website, as I've outlined how I trade breakouts on the LSE market (I don't trade US stocks yet).
Good Morning Michael,
As ever I have enjoyed your article as it is as educational as it is informative and the learning process with your detailed explanations and graphs is excellent..’.
I love the statement you made below as clearly , it demonstrates to me you are critically using your charts and other deep information to guide you through your processes and I imagine that gives you greater insight, than the actual numbers for the company...do you know if there are many guys like you using this kind of analysis ?
I haven’t checked the accounts of SWG to see if it is making money or not, as it’s not hugely important to me. I know there is a possible reason to buy due to the directors, and so I’m happy to test my thesis in the form of a long trade should the price do as I hope. If not – I will remain a non-shareholder..
Best.
Tony
Tony - thank you.
I would recommend reading Mark Minervini's books. Although he is a now a sub service salesman at $500 per month, his books are very good and his system works. My own breakout system is inspired from his system and adapted to the LSE. Mark mainly copied and adapted his from Weinstein or O'Neill - whoever came first.
There is a review of one of his books on my website.
https://www.shiftingshares.com/think-and-trade-like-a-champion/
Hi Michael
A few questions if I may no issues if you don't want to answer all of them if you feel may erode your edge.
AT trades what are these I'm guessing computer driven trades placed by institutions to buy/sell at certain points in the market ?
Re Intercede what was your initial buy point and why and where did you place your stop and why ? also re adding at 55p presumably the logic is there was support now resistance at that point and you want to see if enough demand in market to break through before committing more hard earned to market ?
I am really enjoying your blogs I think money management is a far more important skill than what stock to buy but very hard to master.
Regards
Andy
Andy - AT trades are Automatic Trades. You can see them on a Level 2 screen. It's when a buyer or seller is matched on the electronic order book.
Anyone can place an order on the orderbook using a broker that offers DMA or Direct Market Access. I use IG Index for this. My initial buy point on IGP was on the trading update by the bell, and I added some more when the gap had closed. It's not a large position for me as liquidity is an issue (you don't want to holding too much of a stock that trades infrequently). Re my stop, I tend to watch how market makers act on L2 and so I don't have a stop actually in the market. They might decide to shake the tree and flush me out. Rather, I want to see the trades printed and how the stock is acting. I realise this isn't an exact step-by-step method but sadly one doesn't exist. My stop would typically be around 15% on a stock like this because of the spread needing to be taken into account. On SETS stocks where getting in and out isn't an issue it's much lower.
If a stock is acting right and advancing, I will average up into a position. Averaging down isn't something I do unless I am staggering in an entry on purpose. The 55p area was the price of the last support as you say!
Thanks for your comment, and yes I agree money management and keeping risk in check matters way more than what stock to buy. Whilst you're only as good as the stocks you trade (the best trader in the world won't make any money on a stock that doesn't move), managing your money means you can stay in the game.
Thanks for the reply re AT trades Michael makes sense now when you see an R is that indicating a retail investor trade going through a market maker ?
Also I have noticed when commenting on some of your set up you mention the price moved up and I noticed AT trades coming in just wondered if there was any relevance to that comment that you use to read into the stock movement ie do you place more value on AT trades going through over R trades assuming my thoughts on R trades are correct ?
Thanks again for taking the time to share your knowledge here
Mark mainly copied and adapted his from Weinstein or O'Neill - whoever came first.
Both published in 1988. O'Neills CANSLIM has fundies as well as a lot more similarities, so I assume O'Neil was the bigger influence. However, in his first book Minervini mentions meeting Weinstein and gaining his understanding of 'Stage 2' from him (p64). Weinstein is much more dismissive of fundamentals. Both CANSLIM and Minervini think that these can weight the probabilities. So who knows? Dead heat?
It's curious that both books came out in 1988 when both books use the four stages and are very similar. Perhaps we'll never know for sure!
Good evening Tony - thank you. I think there are a lot of traders who base their decisions on technical analysis, but our community tends to be one of investors which is a different skill set and one which I lack depth in.
As I mentioned below, I'd recommend reading these books:
Mark Minervini: Trade Like a Stock Market Wizard
Mark Minervini: Think & Trade Like a Champion
Stan Weinstein: Secrets For Profiting in Bull and Bear Markets
William O'Neill: How To Make Money in Stocks
Really like these articles Micheal, as ideas to do further research, thanks
Thanks Nursemaid - yes, none of the stocks I talk about are tips but my ideas only.
Hi Michael, I just wanted to say thank you. Your ideas are always thought provoking and a great read. I am a breakout/momentum trader and, in this market, its hard for people like me to find set ups as most companies are trading below key moving averages. Your ideas give me ideas that can apply to this type of market. So keep up the great work. Its much appreciated.
Thank you Sharesurfer!