Sunday, 19 January 2020

TRADE OF THE WEEK #30 - MYCRON STEEL BHD



From the Editor-In-Chief of The Pelham Blue Fund

Outcome
Gross Profit : RM7,009
Return on Investment : 20%
Duration : 2 Days

I was on my year end break overseas when I saw this opportunity. The time zone was not a convenient one; Malaysia’s market opens around dinnertime and closes at 3AM. 

Not too long ago we advocated staying out of the markets during the Christmas break to spend time with loved ones. But the itch has got to be scratched, I suppose. In my defence, I’m terrible at taking long breaks; most of the time I’d think about work, though not at the expense of having a good time with my family.

The reason that I mentioned the time zone difference has a lot to do with this trade. I confess that as incredulous as it sounds, the success of this one boils down to one very simple fact:

I checked the markets at 7:30PM (9:30AM in Malaysia). MYCRON looked good; the stock gapped up at the open, trading at around 36.5-37 sen. Had a nice dinner, went to bed. 

Then I woke up at 2:30AM (4:30PM Malaysia time). MYCRON didn’t move much: it didn’t rally and it didn’t retreat. So I decided to buy boatloads of the stock. The next day, I made 20% yields!

Well, this wasn’t the only reason I traded the stock, but what happened here helped me make up my mind. Conviction is a scarce commodity; somehow I got it in the middle of the night.

Don’t worry, I’m not saying that the secret to profitable trading is to sleep for most of the day and check the markets just before closing time. But maybe we need to really test that theory!

I’ll break down the rest of the triggers that made MYCRON an obvious trade, in my mind.

THE TRADE

To start with : I’m not an expert on the steel industry. Not even a casual observer; it is not really a ‘sexy’ sector, and to my lasting discredit, the team and I tend to focus on the more prominent, news-making, sentiment based, and politically linked companies.

But we understand why stocks move, and we can afford to not be specialists - at least in this case. We can afford to be sector agnostic sometimes, because at a foundational level, stocks tend to behave in similar ways, especially if some new trigger causes them to rally.

So, on 30 December 2019 (my time zone), I did a cursory look at what was driving MYCRON. I’ll list out the peculiarities one by one - each occurrence was a positive check mark for me to trade the stock in large size, and with conviction.

1) The stock breaks out to its highest point in 11 months.
2) The breakout was supported by real news.

The news piece was not hard to dig up; it was just a simple Google search. The story was apparent for all to see.


Now for a small bit of news analysis. It is important to understand that this was a big deal; it was a long and laborious effort to convince the Government to impose higher sanctions to punish dumping activity.

This development has the potential to be a game changer for the long suffering local players - or at least the cold-rolled coils manufacturers. It’s the kind of development that can move the needle from losses to profitability. In short, it’s a piece of news that can fundamentally transform the company’s fortunes.

I was also generally aware that steel counters are not exactly hot commodities these days - excuse the pun - due to dumping activity by foreign companies. It’s been that way for years; again, I'm not an expert, but I do read the papers. 

It was very noteworthy that this petition was led by MYCRON. The mention of the name alone lends some credence for the company to be seen as a major beneficiary. But don’t believe me, believe the prices. The stock moved immediately after the news came out. The stage was set for an even stronger price move.

MYCRON’s daily chart up until 30 December 2019

3) Stock gaps up + strong breakout + volumes emerging.

Now for a small bit of price/volume analysis. And by ‘small’, I mean anyone can do this. It does not require an exertion of massive brainpower.

Gap ups are powerful triggers, and better yet when they are paired with a price breakout. We touched on the same principles recently with the EKOVEST trade; that one was good enough for RM5,000 in profits in two days.

In MYCRON’s case, it’s similar. Notice that the stock closed at 32 sen on 27 December 2019, after the news came out. That was a gap up in itself.

More importantly, on 30 December, it gaps up, again! There was no selldown or weakness. As you can see in the chart above, MYCRON opened at 35.5 sen, or a massive 10% gain overnight.

4) ‘Small candle’ indicator.

Small candles are good for three occasions - during dinners, in the bathroom, and in the middle of a stock’s price breakout phase. If you’ve been following our content for while, you can probably guess that I consider the last one to be the most romantic.

Note the above chart again. See the right-most part? That’s the small candle. Essentially the stock didn’t move too much beyond where it started the day. From 35.5 sen, it peaked at 37 sen, then gave up to 36 sen; you know, normal fluctuations.

But the crucial thing is that it made no wild moves. It didn’t collapse to 30 sen. And equally as important - especially if you’re thinking of buying the stock - it didn’t skyrocket to 45 sen.

It became obvious that there was still much strength in the stock. For one, the price chart defied the ‘sell on news’ adage, meaning that the stock was still perceived to be undervalued. The second kicker is that MYCRON ended the day at its intraday high of 37.5 sen; the absolute best case for a momentum stock.

On balance, it was worth the risk to get an exposure in the stock. And this was decided based on what I talked about right at the beginning...

5) The ‘gap up’ price was sustained throughout the day.

This is where the fact that I went to bed and woke up mattered. I was genuinely surprised to see that MYCRON was still at around the same levels throughout the day. It basically meant that nobody was really selling serious volumes; on the other hand, it was apparent that someone’s buying, slowly and stealthily. Then I wanted to buy stealthily, too.

The following five minute chart on 30 December 2019 shows my point.


So of course, before the market closed I ended up buying some, and outlined the parameters.

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I ended up buying a large enough size for the trade to be worth the trouble : 90,000 shares. Not easy to do when this made up 4% of MYCRON’s total volumes on 30 December.

Then, on the last day of the year, all hell broke loose. Steel counters - cold-rolled coils or otherwise - rallied massively. EMETALL went up 39%, YKGI up 9%, LSTEEL up 19%, and so forth.

But MYCRON led the way by virtue of having rallied earlier. On 31 December, it hit an intraday high of 26%.

I knew to sell into the red-hot rally: it was just a matter of letting go of small lots without disrupting the prices. On balance, I think it worked out well.

Here’s the overall stat for the trade, and note the average prices (the average purchase price was slightly higher as I bought at the closing of 30 December - no choice but to go in at 37.5 sen.




So yeah, on balance, I suppose it was worth the trouble. Even on holiday.


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