Tuesday, 3 March 2020

TRADE OF THE WEEK #32 : MI TECHNOVATION BHD (TECHNICAL BREAKOUT TACTIC)

Outcome
Gross Profit : RM4,300
Return on Investment : 11%
Duration : 2 Days



For once, the breakout isn't the one on our faces. It's in MI, a brilliant company that we have obsessed over since it listed.

We made some good money when MI made its debut on Bursa Malaysia back in 2018 - RM13,000 in four days - but as is the case for short-sighted traders, we would've made multiples had we just held on to the stake. Please lend us a half million ringgit credit line and we promise to hold on to these kinds of golden opportunities, OK?

Since then, the stock has only gone up, then down, then up again. The chart is a thing to behold.


We would not have been able to stomach this kind of volatility, but here's the thing about MI: it proved its worth in the best way. The stock is racing up now simply due to consistently strong earnings. It did take a 55% correction but now it's made up the entire downward phase. Long term shareholders should be pleased.

We are not one of those lucky people, but we do know when to go into the stock : when, and only when, it stages a technical breakout. To do this successfully, and by all accounts, we managed that with an 11% gain overnight, the trick is to be patient. 

Like, stone cold patient, and not of the Steve Austin variety. No head smashing; just stay put, and wait for the right time to open up a can of... well, let's move on.

Our confidence in this play was higher than usual, because we were replicating tried and tested techniques. If you've been reading this blog for a while, you'd probably see that the application is identical to past successes; same play, just a different stock.

To simplify, we'll do just a bit of technical analysis here. First, understand the chart. Then, understand the context, and why MI stood a good chance of breaking out exactly when it did.

We were just waiting to go in, and it took weeks. No biggie; we nailed it as we intended.

ZONE A & ZONE B

We hope you're familiar with these squiggly wiggly charts, cause we're in candlestick territory now.

There's this thing called a consolidation range - basically, a horizontal 'channel' where the stock just fluctuates. It tries to go up but fails a couple of times, and the aggregate outcome is that it went nowhere. Oh, and pesky things like coronavirus scares ended up driving the stock down. But then it went back up after the dust settles.

Below is the recent consolidation range for MI. In this daily chart, we divide this into two distinct rectangles: Zones A and B.

Zone A is the first range of between RM1.80 and RM1.95, where the stock was just hanging around and chilling - it didn't seem to be in a hurry. 

Notice the transition between the zones. There's a succession of price increases which brought the stock to RM2, that pesky, psychological resistance point.

If you're new to this, know that when a stock breaks RM1, RM2, RM3, whatever, it usually takes a while to go beyond. This is why we didn't want to trade as soon as it hit this point in Zone B; we figured that it's going to spend some time trying and failing (just like in Zone A)

Here's the recipe for a sustained technical breakout:

1) stock needs to fumble around for a while, and build some strength. 

2) stock needs to have a collapse in price, then recovery. This is how you know it's well supported by the market.

3) when the breakout eventually comes, it should look obvious. Because when it does, the whole market will jump in and buy into it.

Understandably, you may be wondering what the f are we talking about. But we just put technical concepts in layman's terms. Showing how we traded is probably more illustrative of the concept than us trying to explain it.

In practical terms, all we did was that we kept watching MI throughout January and most of February, waiting for the right time.

ZONE C, AND THE RIGHT INSTRUMENT

Now for the fun part. We planned this meticulously because the eventual breakout beyond Zone B will be spectacular. Why? Because it would be a new all time high breakout, and it's more powerful than the face of a 15-year-old kid with too much testosterone.

Zoom out the chart a bit and you'll arrive in Zone C. We have to go way back for this, so what you see below is the weekly chart for MI.


The last time it was around RM2.10-ish was in September 2018. It took a while for MI to get back into that range where it could plausibly break a new high. We had already estimated that there's a good likelihood of this breakout, and the timing couldn't be better.

Context is oh so important. The next insight is simple : MI is making all these positive moves so close to its next quarterly earnings announcement. 

On balance, it's not too much of a leap to theorise that the current stock price move is related to upcoming earnings. Even more so when a stock tries to break new all time highs. 

We know enough to understand this and to have replicated this type of trade before. It got us RM10,000 profits in GCB in three days, so we were quite confident that we know our shit.

The last important but is not so much insight than a tactical decision : get the right trading instrument to amplify returns. We found that in MI-CG, a recently issued call warrant. We discussed this approach in our VIP Group quite early on.

Commentary on 7 February 2020

Amplifying returns is why warrants exist. You can buy more at a fraction of the mother share price, and boost returns even if the quantum of movement is smaller.

The call warrant was the perfect thing to trade once MI shares break out. And on 19 February 2020, it did so with conviction.

Also, here's the thing about breakouts: the longer the consolidation phase(s), the stronger the price movement is when it goes beyond that range. On 19 February, we actually ended up in MI-CG at what we'd usually consider to be a sub-optimal price : 15.5 sen. It closed at 13.5 sen the day before, so we were obviously late into this.

 Made the call on 19 February

But did being late matter? Not if there's a chance it can move higher. The previous all time high is RM2.21. We entered MI-CG when MI was trading at around RM2.16. There's about 5 sen to contend with, and if our theory was correct, by the time it tries for RM2.21, our call warrant position would already be profitable. 

And let's not forget how exceedingly difficult it is to achieve double digit % gains in 24 hours.. we dedicate our lives to find trades like these.

No prizes for guessing what happened next. 


This range was good enough for us to get to where we wanted to be. At 11% gains? Quite happy to exit. In less than 24 hours, in fact.


Oh, and all that stuff we said about expected earnings? On 20 February, this came out.


 All in all, not too bad.

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