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By JL | July 2, 2007
When PeHon spots a potential winner, it’s always exciting. If you’re too lazy to go through his reasoning for picking the stock, you only need to look at his records to know you can trust his judgment. As usual, he’s found something safe (not speculated on) that has been growing, is currently growing, and looks set to continue growing.
Ok, so we now know what to buy. The next question is when to buy it. Since the March correction, this counter has seen a relatively non-volatile upward movement within a very consistent trading channel. It did this obediently for four months, chalking up an average volume of 4.3m shares daily. I don’t see this trend slowing, deviating or reversing any time soon, unless something beyond the ordinary scope of trade happens to it. Right, how would I play this then? Under normal circumstances, the decisions I make in regard to a buy call would be classified either as short term, medium term or long term. My definition of each is as follows:
- Short term: Within contra period
- Medium term: >1 week to a month
- Long term: More than 1 month
Let’s explore each in turn.
I’ll start with long term, because this is the easiest.
There is never a bad time to put your money into a good stock like this one if you’re prepared to buy and hold long term. We are currently in a bull market that doesn’t seem to want to end or even slow down. The global economic outlook remains bright. The risk areas in the US (housing, subprime mortgage and inflation) are relatively well contained. Personal income and personal spending continue to rise. The emerging markets are charging forward, supplying excess liquidity that’s constantly being pumped into the equities market, because that’s offering better returns than any other instrument for its given level of risk. What better time to put your money into equities than now? For sure, there will be hiccups and corrections along the way, but unless something MASSIVE rocks the whole world, the bull run will continue on the back of expected strong Q2 results. If you need to know what target price and time frame I’m looking at, follow the trading band in the chart above and make your own judgment.
Medium term. This is relevant to investors who have a capital and/or time constraint. The concept of investment here is to enter and exit a stock at the most appropriate times. And these moments would be determined by technical indicators. For this counter, I will rely on my favourite oscillator indicator, the MACD, again. Notice on the chart how the MACD rate of change is currently negative and causing a downward sloping histogram. All-in-all, we are seeing a negative divergence, a new negative MA crossover, and a positive absolute MACD. My decision is simple. I will not buy this stock now based on what I see on the chart for a medium term investment. I will wait for the negative signals to reverse before making a move. This decision is backed up by the short cover Parabolic SAR signal (which also serves as a reliable buy signal most of the time) still waiting to collide with the price candlestick. Confused? Think I’m contradicting what I said in the previous paragraph? Shouldn’t I then use this to determine the entry point for long term as well? The answer is no. Using technical indicators like MACD will help you buy something right before it makes a lasting upward move (supposedly). This however does not equate to buying it at the lowest price. MACD is not directly proportional to price movement. It could be going down while price is going up, and vice versa. As proof, blow up the chart and take a look at 26 Jun and 27 Jun. So, in the case of Aztech, it might well be $0.585 before technical indicators signal a buy. By then, long-term investors who bought at $0.56 would already be ahead.
I’m actually quite reluctant to discuss short term, because this really isn’t the most recommended way of trading stocks, but for the sake of completeness, I will illustrate a possible scenario with Aztech. Please note: THIS IS NOT A RECOMMENDATION! This form of trading, although exciting, carries very high risk and requires undivided attention full-time. Right, with that out of the way, let me get back to teaching you all the bad stuff about contra trading. 
What I usually do is this. I hunt down stocks showing signs of what is called a bull flag formation. This is a common phenomenon when a stock chiong on positive news regarding the company. Gaps are not absolutely necessary, but they are usually present. The upsurge must be matched with much larger than normal volume. This sharp upward movement forms what is called the flag pole. Following the breakout is a period of consolidation, when the stock trades in a consistent downward sloping channel, thus creating the flag. The good thing about bull flags is, it happens in several waves - the upsurge will happen more than once. When consolidation is complete, it will experience another breakout typically of the same magnitude, which is the flag pole length. So from the chart, we get the following data:
Last done price: $0.575
Breakout price: $0.575 (according to resistance line)
Confirmation: $0.605 (above previous high)
Buy price: $0.590/$0.595 (from my own criteria)
Target daily volume during breakout: >7m shares (this MUST be satisfied, else it is not a breakout)
Flag pole length: $0.1 (some optimists might have this as up to $0.125)
Target price: $0.675
Cut-loss price: $0.575
* Data is for 2 Jul 2007, and not valid for any other day.
Like I said before, this is for reference only. The most important thing about trading bull flags is to be… immovable. Do not be emotional. Set up the prices properly beforehand and stick to the prices. Cut loss if necessary because bull flag signals are not always true (at least 3 of 10 are false signals from experience). The trick is to cut out early on false signals, and ride with the winners.
Topics: Aztech |
Comments
July 2nd, 2007 at 10:36 pm
Hi JL, if you look further back the chart you will probably see the rising wedge forming. See chart below (hope I post it right)
[URL=http://imageshack.us][IMG]http://img530.imageshack.us/img530/9416/2007julaztech640×382oe3.png[/IMG][/URL]
Shot at 2007-07-02
Dont know if it had broken out of the wedge. Also please commend on the 2 marked areas on the macd wrt the price barchart. Think I will wait for prices to come to the support line before I look at the other indicators again then decide to enter or not. Please give your views. Thanks
July 2nd, 2007 at 10:46 pm
Hi JL, if you look further back, you will see a rising wedge. Dont know if its considered having broken out of it. Also note the areas marked on the macd as marked out in the chart below (hope I can post it).
personaly I will only enter when it comes to the support line ( after a relook at the indicators).
July 2nd, 2007 at 10:48 pm
look like I cant post the chart using imageshack.us
July 2nd, 2007 at 11:26 pm
Thanks dude, I see the rising wedge.
There were only 3 days or so traded outside the wedge, so I don’t consider it fully broken, but then, I’m not worried about it because it’s currently trading at the top of the wedge rather than the bottom - risk of a reversal is low.
As for the MACD, the shaded areas are negative MA crossover points. That’s why I said I wouldn’t buy it now
Notice how the Parabolic SAR short covers almost always coincide with the positive MA crossovers. In my opinion, these two in combination would serve as a good buy trigger.
July 3rd, 2007 at 12:06 am
huh?? dont tell me you could see my chart. Anyway the macd refered to 6-8 Feb 07 and now these few days. The parabolic sell signal would likely be triggered if tmr price hit 0.555. If rule 3 of TA were to apply, it looks like its going down (hope I m wrong). The current bull flag bottom (transfering the flag resistance down) would theoritically hit the lower overall support at around 0.53(0.528 on chart) at about 5th July??? HAHA hoping.
My email is www.8899@hotmail.com. Maybe you can sent me your email. Appreciate your sharing very much. Hope you dont mind me learning from you.
July 3rd, 2007 at 12:55 am
Yes I can see your chart at http://img169.imageshack.us/my.php?image=2007julaztech640×382gm6.png
Actually my parabolic buy cover got triggered on 26 Jun because I was using a 0.025 acceleration.
This isn’t a good candidate for bull flag/pennant/triangle formation. It seems to be forming a cup at the moment, although I’d say it could still move either way in the next few days. I’m guessing it will break out only when the full cup is formed at around $0.590.
You give me too much credit dude. We’re all learning still. My email is lai.jack@gmail.com
July 5th, 2007 at 9:12 am
Hi JL
Good call on Aztech.
Love your site which provides a balance view on FA & TA.
Keep up the good work.
Cheers!
July 5th, 2007 at 9:42 pm
Hello there, I like the site too.
It belongs to PeHon, so the credit is all his. Would be great if we could have a forum-like feature here for more interaction.
July 6th, 2007 at 1:10 pm
hey thanks for all your support! =)
July 6th, 2007 at 10:52 pm
Wow, away for just 3 days and Aztech fly. PeHon, your pick is real good.
July 7th, 2007 at 9:53 pm
hey, thanks for your compliment. =)
July 8th, 2007 at 8:38 pm
Hi Pehon !
It’s been awhile….I thought you had disappeared from your previous blog, but found that you had posted a link to your current blog.
Will be reading through your posts and commenting (and clicking on your ads to help you if I like what I read hehe). I was hoping you could pay a visit to my blog too at http://sgmusicwhiz.blogspot.com which I had started about 2 months ago.
Hope to see more postings from you. Welcome back !