Tuesday, 12 May 2020

SINOTOP : LIQUIDITY BREAKOUT PRINCIPLE GETS US RM36,000 in 2 HOURS [TRADE OF THE WEEK #35]


Outcome
Gross Profits : RM36,732
Return on Investment : 37%
Duration : 2 hours



We have done this before. Similar situation, different stock, same outcome.

This time, not only were we fully prepared, we went for the jugular. Hence the freakishly large profits - by our standards.

Preparation comes from experience, and from sensing certain market signals. A lot of this is a combination of instinct and rote learning; with price-volume analysis, you simply have to put in the hours. Watch the markets, identify the peculiar movements, and be ready to jump in.

Having been in a similar situation before means that we can act just slightly faster, with slightly more conviction. Once our breakout signal was triggered, we were very keen to go all in to capitalise on these kinds of extraordinary opportunities.

In high stakes trading like this, there is no playing it safe. The assumption of high risk means that the payoff has to be decent enough to be worth the trouble.

Going for the jugular means the difference between getting a 'modest' profit of RM1,000 and truly extraordinary five-figure profits.

37% yield. Two hours, excluding the midday market break. In by 11:00AM, out by 3:10PM.

Approximately RM300 received per minute. Or RM5 per second, if you dig the math.


LIQUIDITY BREAKOUT : AN EXPLAINER

History does not repeat itself, but it sure rhymes.

Below is our playing field. That price spike on 27 April 2020 was the day we traded this.


SINOTOP daily chart

We define liquidity as the synthesis of price and volume of a stock.

Then think of a breakout as a feedback loop. Higher price brings in trading volumes, which drives up prices.

Then, before you know it : boom, the stock jumps 10% in a day. We call that a breakout, driven by incoming liquidity. Hence the term.

An extraordinary outcome carries long odds, and that's where the payoff potential is the highest. It's like Leicester City winning the Premier League, or Tan Sri Muhyiddin defying expectations to jump the prime ministership queue.

When you manage to get ahead of the curve, at the very moment the extraordinary event is occurring, that's when a trade can deliver massive profits. Si Kitol would know what we're talking about...


THE TRADE

For starters, read up on our earlier posts on GETS, SEDANIA, and SCNWOLF. They are very similar to what happened here with SINOTOP.

When we encounter these kinds of situations - or to be precise, when we think we are encountering them - we get an acute sense of déjà vu.

Having lived those past lives, we would have a general view of how a similar trade is supposed to play out. It is like writing a script for the market, which is something we encourage you to try out.

Having a script is just another term for scenario analysis, really. A simple example of a chain of events that would validate our views:

A = liquidity breakout

B = short term price fluctuations

C = stock price breakout <go for the jugular>

D = volumes come in to chase (the latecomers)

E = stock price hits the stratosphere

In this simple script, A would be the trigger for us to look into that stock. In the best case scenario, A leads to B, and to C, and so forth, culminating in E, which is the outcome everybody wants in the stock market.

Correctly identifying liquidity breakouts is the pathway to riches. We have been obsessed with this for years. Sometimes we nail them, and sometimes they are just fake-as-f movements.

As it turned out, A eventually led to E in SINOTOP's case, because it turned out to be exactly the best case scenario.

We'll denote the letters by their respective time periods. In this discovery process, our thinking and trading are guided by these succession of events.

SINOTOP's five minute chart, 27 April 2020

A = Liquidity  breakout, 10:05 to 10:30AM

Not normally known for making fast moves, SINOTOP suddenly jumped from 15 sen to 24 sen in half an hour. That's a 60% rise; you'd be lucky to find a single stock that does that all year long.

There wasn't much selling resistance here. It just very easily broke that 20 sen mark, where you'd think there would be some selldown pressure. But no.

We watched the movement with intent. Was there a justification behind it?

Looking into the filings, there was this seemingly innocuous announcement on 23 April. Maybe that was the clue.

But at 10:30AM on the 27th, a bigger question looms: after that sixty percent jump, does it stand a chance to go even higher?

And even more crucially : would we be out of our damn minds if we think there's a chance?

Another hurdle in these kinds of situation is something you have to get some mental practice on: envisioning the seemingly impossible.

As we have said before, there's always a probability for everything, however remote it may be.

Either this thing was going to fall apart, or it may skyrocket. But it will likely happen fast, possibly within one day. At least that's what the bulk of our collective experience tells us.

But we got our first clue already for SINOTOP : the stock didn't even fall back below 20 sen, which would have been a likely indicator of the breakout fizzling out. It just stayed there between 20 and 24 sen, although on very low volumes.

B = short term price fluctuations, 10:30AM to 12:30PM

We then decided to give it a shot, having accepted the possible losses. Our first entry was at 23 sen, with some more minor buying at between 22.5 sen and 23.5 sen.



As shared in our VIP Telegram Group

The parameters were mundane, sensible even. 25.5 sen is the assigned target simply due to us practising the 2:1 reward-to-risk principle. With these parameters, we were risking a 1 sen per share loss for a 2 sen per share gain.

But of course, if this thing suddenly skyrockets, we probably wouldn't have to rush to take profit at 25.5 sen. That was the idea and - although we hate using this word in trading - the hope.

Of course, as it so often happens, SINOTOP went down after our purchase. We had extended ourselves to the tune of 150,000 shares by this point, meaning that a one sen decline would lose us RM1,500. Not pretty.

For the next hour and a half, the stock flattened out at the 21.5 to 22 sen range. Our assigned stop loss of 21.5 sen was hit, so we trimmed the position by 60,000 shares. We absorbed the losses.

But simply due to the fact that the stock failed to completely collapse, we decided to hold on to the rest. The market closed for midday with the stock being somewhat of a dud.


C = stock price breakout <go for the jugular>, 2:30PM



At the 2:30PM market reopening, SINOTOP suddenly jumped with no explanation. In a span of five minutes, the stock flew past our initial buy range and target price.

From our real time interpretation of the movement, it was all the signal we needed. We couldn't doubt ourselves at this point, because we were about to go all in. (Editor's Note : even when we do go all in, the stop loss remains sacrosanct. Usually during strong rallies, we'd upgrade the stop loss price, sometimes to a point where it becomes a profit lock-in price)

So not only did we replenish that entire 600 lots position, we acquired several thousand more lots prior to the target price being hit. It took a couple of minutes.

We had courage in our conviction because we've been through this situation before. With the liquidity breakout, our expectation is for the stock to rally further, and hard. Forget that earlier 60% gain in the stock price; in this kind of trade, SINOTOP can gain another 60%.

D = volumes come in to chase (the latecomers)
E = stock price hits the stratosphere, 2:35 to 3:10PM

We positioned ourselves early, and we got to ride the wave from the start. That wave really came from a sudden influx of trading interest and volume, but only once the stock had its breakout from beyond the 25 sen mark.

Recall the feedback loop:

 Higher price brings in trading volumes, which drives up prices.

When the script in our mind is playing out in real life, we stopped having doubts. The steps to be taken were very clear. We also knew when to get in, and how to get out.

No time to second-guess. No time for buyer's remorse; a normal occurrence when you're suddenly holding hundreds of thousands of newly acquired shares. Focus and clarity are crucial. There is no 'happiness' or 'fun' when the stock is skyrocketing; our primary focus is to exit this trade appropriately.

In that thirty-minute period prior to 3:00PM, there was a rush to buy the stock. It shot up like crazy. 28 sen. Then 30 sen. Any possible resistance points there? Just like when SINOTOP was at 20 sen, any supposed selling pressure was obliterated by the sheer buying.

No selling pressure at 20 sen, then none at 30 sen. It's a microcosm of history rhyming itself.

And so it got to the point where we sold everything. It took multiple orders so as not to disrupt the price move.  SINOTOP was trading in small lots with each price increments - 300 lots at 32 sen, then 400 lots at 33 sen.

We firmly sold into the rally as our targets had already been met. We managed to exit at 34 sen, even though the stock hit 40 sen right after. No matter; we don't waste our time trying to time the peaks.

400,000 shares sold.




There's one last piece of this puzzle that we didn't elaborate on:

If we were clearly out of our damn minds to trade a stock that was up 60%, how much more insane does one have to be to acquire close to half a million lots of a totally illiquid penny stock?

POSITION SIZING, WITH ABSOLUTE CONFIDENCE

In a counter whose normal buy and sell queues are about 400 lots each, it's never easy to build a large position.

Relative to those 400 lots, our sizing ended up being 10 times larger. 4,000 lots, or 400,000 shares.

It means that each 0.5 sen movement is equivalent to RM2,000 in profit, or loss. A single sen move is worth RM4,000.

We sort of bent the truth here: we didn't have absolute confidence. It is nearly impossible to, but we were confident enough to ride this out.

Conviction-driven courage is what it takes to build large positions. After the position is built up, it's stop loss management all the way.

To get to a point where such position sizing doesn't make you want to vomit - and to stand a shot of making RM30,000 in 2 hours, you simply have to work your way up. There's no special sauce that we can share. It takes years of blood, sweat, tears, and other secretion of fluids.

Year 1 : get comfortable with holding 200 lots.

Year 3 : 800 lots

Year 5 : 500 lots

Year 10 : 3,000 lots

Nobody said it was easy. But do you see the payoff?

More Tales By The Pelham Blue Fund