Thursday, 28 May 2020

CATCH THE KNIFE THREE TIMES : OUR LITTLE ADVENTURE WITH GREEN PACKET [TRADE OF THE WEEK #36]




Outcome
Gross Profits, Combined : RM30,975
Duration : Four days


To be a very good trader, there's no avoiding this moment. We need to prove that our abilities are down to skill, not luck.

One specific ability is to capture winning trades at the very moment a stock or warrant collapses. When there is peak fear, or massive dumping of shares at any price, we must go in if the circumstances are just right.

Being a contrarian is not in the saying; it's the doing. And this is what we consider to be the highest of high stakes trading, which means that if I can't execute this skill properly, we would never get ahead of the competition.

To most of us who are familiar with trading business, we call it 'catching the knife'. It's the thing that happens when a stock suddenly takes a precipitous, nauseating dive; do you go in? If so, when? And at what price? And how do you know that it's not going to drop another 20%?

No amount of fundamentals research can equip us for this. It's just the market offering a quote, and us contemplating whether to take it. This is trading at its most pure.

To carry out this mission, we have to rely on our historical understanding of price volatility, on sentiment, and how the herd behaves.

If there are mental maths to fiddle with, we have to do it quickly in our heads, because the whole idea-to-execution phase can take seconds. A small timeframe, but for big money.

It's the holy grail of price-volume analysis; we are supposed to be able to trade just by looking at how prices behave in real time.

If we were to truly simplify this technique, we'd simply call it : sensing fear, to make money. That's pretty much what catching the knife is all about.

Most people think they can do it; most get hurt. We spent years honing this skill. We had some deep cuts too.

To prove that this piece of skill is not a fluke, we didn't do it once. We did it three times; still want to call it luck?


THE BACKGROUND

Green Packet Bhd has been busy reinventing itself. From its past as a P1 WiMax provider, through some financially troubled times, shareholding and management changes, and the whole lot, it is back and it is in great form.

Its platform, Kiple, promises to be a one-stop shop for every company's e-solutions needs. It's also been tailored to meet exacting specifications brought about by COVID-19 and the ensuing Movement Control Order.

Oh, and it's been on a relentless marketing blitz. You couldn't have missed it. We have read about 5 articles in one week; some we couldn't figure out if they were impartial business stories or straight-up advertorials. Am not even sure if anyone cares, as long as the right names were mentioned...


Wait ah, zoom in a bit.... and boom!


Hit us in the face like a ton of bricks, this one.

It's fair to say that so many things are happening here, making for a compelling story no doubt, and we are keen to see if all this talk translates to earnings over the next few quarters.

If it doesn't... well, there's nothing new there.

But in the meantime, with new retail traders nowadays scurrying about like termites out of hollowed woodwork, the market does what it does best: go totally nuts over the stock. We are also humble bugs; this is a stock that we can trade.

So we answered the following question, which we assume is about trading the stock.

READYYYYY

Now for GPACKET's stock and warrant, which tend to do very weird things that we will briefly touch on right now.

These are the terms of GPACKET-WB, the associated company warrant.


The mother share - GPACKET's stock - had shot up like crazy in mid-May as KipleMania took hold. This left a gaping chasm between the mother share and its warrant, or at least the price in which the warrant is supposed to be trading.

Theoretically, the warrant can get you a free lunch. This was something we discussed in the VIP Group, as our members offer their views:




The basic arbitrage idea is this:

1) Buy GPACKET-WB

2) Convert immediately by paying 40 sen per share

3) Once paid, you get GPACKET shares that was paid for below the market price. This was during a time when GPACKET was trading at RM1.20 in the open markets, while the total conversion cost (warrant price + exercise price) was just 80 sen or so!

4) Once you get GPACKET shares, sell them in the open market and get that price difference as pure fat profits. Literally green packets of duit raya!

But this is where you need to hold your e-horses and do some temperature checks.

Even if you call up your broker and sweet talk them into expediting the warrant conversion for you, the conversion period (the time between confirmation of conversion and receipt of newly quoted shares) can take anywhere between 10 days and two weeks.

The warrant conversion process, as kindly shared by a VIP member


Two weeks of constipation, lost sleep, and over-active perspiration for the promise of free profits? Some may take it, but we wouldn't.

We know enough about the stock to understand that it's being hyped over the moon, hence we do not trust the price movements. But that does not mean we can't trade it.

THE STORY OF THE FOUR TRADES

So what we ended up doing were four very distinct trades, at different phases of the price moves.

1) TRADE 1, 15 May - GPACKET, trend trade

2) TRADE 2, 15 May - GPACKET-WB, catch the knife

3) TRADE 3, 19 May - GPACKET-WB, catch the knife

4) TRADE 4, 20 May - GPACKET, catch the knife

You may have to squint a bit at this chart, but these were the exact points where we bought and sold GPACKET, for Trades 1 & 4.

5-minute chart, GPACKET

As for GPACKET-WB, Trades 2 & 3 look like this. Note that we made good profits on the warrant precisely because we were able to 'catch' it near the intraday lows at the time of entry.

5-minute chart, GPACKET-WB


TRADE 1, 15 May 2020, GPACKET

Very simple trend trade where the five-minute chart clearly indicates a stepladder pattern. From the way the stock behaved, the way it easily broke past the RM1 barrier from the day before, and the constant buying interest during the morning session, we deduced it was worth a shot.

It didn't take long for the target to be hit. We conservatively took profits before the midday market break, at 1.19. This was a textbook trade, and we achieved modest profits.

In the afternoon session, the stock actually hit RM1.27, or its daily limit up level. We didn't stick around for the fun and games; GPACKET then collapsed to RM1.10 before rebounding to close at RM1.20.

It was crazy volatility, and one that we were not surprised to see. This stock was moving all over the place.

We personally wouldn't be able to stomach these big moves. As you may know, GPACKET eventually moved to as high as RM1.65 in the next couple of days. And just as quickly, it collapsed to 90 sen in the subsequent couple of days.

If we had stuck around, we'd have lost our shirts. But we figured that many would have been stuck at the peaks, purely due to chasing this thing all the way to the top.

Almost immediately, we considered ways to utilise the knife-catching angle. It's called that because it's not for the fainthearted, and those who screw it up get cut. Real bad.

TRADE 2, 15 May 2020, GPACKET-WB

Recall that there was a ridiculous valuation gap between the warrant and the mother. GPACKET was heading up to RM1.20 by midday.

Conventional thinking would suggest that GPACKET-WB was massively, gobsmackingly, undervalued - hell, it was at 52 sen!

If uncle pays 40 sen to convert, the total cost is only 92 sen woi! Surely can sell back at RM1.20, pocketing the 28 sen per share profit!

Right? No, we don't think so. Our comment stands, to this day.



Here's an easier way to think about this conundrum.

It's not the mother share rising and the warrant needing to catch up. Look at it in reverse.

Our thinking : precisely because the warrant refuses to rally up and narrow this ridiculous gap, the following are not just plausible, they are likely.

1) The warrant's movement indicates that it's the mother share that is destined for a price decline.

2) The warrant's movement is clearly controlled by somebody or other high volume players.

3) Don't trust the prices... healthy skepticism is how you don't end up losing your shirt. Or lose your shit.

You may have noticed this very clean, very controlled price move. Look at the rising movement in the 5-minute chart for GPACKET-WB... before all hell broke loose!


From 9:20AM to 3:10PM, GPACKET rose 27%.

Then, in a span of five minutes, it fell 23%. 3:10PM to 3:15PM.

So why does this happen? We won't mince words here : the market was being suckered into chasing the warrant due to that 'premium narrowing' angle. During this price ascent, the big players had a field day selling into the rally. DISCLAIMER : Pel is not one of those big players ya *halo emoji*

And of course, when the price collapses, everyone rushes for the exit. This provided us with the first knife catching opportunity.

With a price collapse of such magnitude, we figured that we only had to get in near the day's lows, which marks a complete wipeout of the previous rally. When something falls by this much, this fast, there was a good chance for a temporary price recovery.

The second critical aspect is instinct. By looking at the feverish selling, we were able to reasonably estimate when the panic selling is overdone. That's when we bought a thousand lots.

It felt like eternity, but it only lasted 56 seconds. We made RM4,000 in profits.  Boom.


TRADE 3, 19 May 2020, GPACKET-WB

On this day, GPACKET went ballistic (again). It peaked at RM1.65, then spent the next 40 minutes falling to RM1.20 at the low end of the price move.

That's a 27% decline in just over half an hour.

Obviously the reaction is predictable : people running for the exits again! And with this script repeating itself, GPACKET-WB falls from 46 sen to 30.5 sen.

This was another peak fear phase, and we sensed that RM1.20 might be the end of it for the mother share.

The swiftness in the warrant selldown was suggestive of another panic phase - the selling was noticeably quick and noticeably indiscriminate. There was a finite time window to catch it and aim for a recovery.

As is usually the case in knife catching, the preference would have been to buy into it at the bottom of the selldown, for example an obvious support point such as 30 sen in this case.

There was ample buying between 30.5 and 32 sen levels to confirm the existence of buying support, and we happily pulled the trigger just above.


For a 16-minute trade, this one reaped tremendous rewards. Again.


TRADE 4, 20 May 2020, GPACKET

We don't really plan these things out. This would be the fourth trade in a span of five days, but there is just no way to pre-plan something like this.

If there's opportunity, we capture lah.

It's like being a market maker of last resort. If there's a selling demand to be met, we'd come in and provide our services. This practice needs to be precise; a single wrong move and we'll end up holding the bag as the rest of the sellers run for cover.

In the worst case scenario, it might be us who turns into the panicky one. We have been the suckers, many times before.

Here's a closer look at T4.

5-minute chart, GPACKET

Again, the stage was set for a selldown. A big clue here is the long green candle on the left side (9:00 AM, Wednesday). GPACKET's stock actually showed some promise there, having jumped from RM1.04 to RM1.10.

But alas, it was not to be. False breakout.

The failure to rally by 9:05AM was as clear a sign as any  that this thing was heading down. And sure enough, in the next 15 minutes the stock went under, breaching the all-important RM1 support point.

Our thinking was that the real buying opportunity is not just below RM1; it's near the bottom of whatever new low this stock is heading towards.

It begs the question; if we can't see the bottom, how to know when to jump in?

The answer lies in subjectively interpreting the real-time price moves, and taking calculated risks. To simplify things, we were accepting the possibility of two potential outcomes:

1) That 90 sen may prove to be the bottom

2) That it may even head lower, perhaps to 80 sen.

Because this is a world of imperfect information, we decided to jump in anyway around the 90 sen mark. A move against us is probably not enough to do lasting damage, except for a temporary ego bruise.

Price-volume analysis. Decide. Pull the trigger.

The key here is fully accepting all possible losses.

As we contemplated GPACKET's potential recovery, mainly by browsing Lazada for frivolous items to buy,  some little clues start emerging.

At around this time, GPACKET-WB stabilized near its own intraday lows. For a warrant that's well known for massive liqudity, there was huge buying support there.

The much less liquid GPACKET was doing pretty much the same; the market essentially is taking its cues from the warrant's movement too. If felt like longer, but the move from 90.5 sen to 96 sen took just five minutes.

The most important thing here, as it would be in all knife catching situations, is this:

The best entry point determines the highest profitability.

This is not dollar cost averaging. This is not playing it safe. This is about sensing peak fear, assessing the price-volume characteristics of the stock (or warrant) at this peak fear phase, taking calculated risks, and making the trade.

Pulling the trigger was the hard part. The rest of the day was pleasant. The stock recovered to above RM1 levels, and the position was disposed one it becomes apparent that there was a strong selling resistane at RM1.04 levels.

And oh, the position was a fairly large one. So exiting this came naturally; a general rule is that if the position is big enough to lose sleep over, any excuse to take profit must be considered.

The move was worth a 7% gain, and a five figure profit.

Four trades. RM30,000 in earnings. 

Not bad lor...

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