Melbourne IT (h)IT by profit-taking

By Kenneth Robson on June 20, 2014 • ( 0 )

This post highlights a trading situation that is very familiar to retail investors. It is one that can repeatedly trap them into an immediate loss on their new share investments. It illustrates why it may be unwise to “chase” a rising share-price, to get on board a “hot-tip”, a profit upgrade, or an upbeat company or analyst report.

One sign, in my experience, that a trading scenario is being high-jacked by opportunist short-term traders likely to quickly exit, is when one’s position in the market depth is quickly gazumped, and one’s order remains unfilled.

A safer entry recommended by those with a technical mindset is in the depths of a retracement. This does not mean entering while the price is still declining, but when there is technical evidence of a trend reversal, or the share-price has started to rebound.

The problem
Hit by profit-taking

Technical observations

Points which can be made from this chart:

an impulsive move commenced on April 30, 2014 creating a break-out through long-term resistance at $1.50
This was the start of six trading days of positive gains quickly exceeding a $1.75 target to reach $1.82. Such a move may well be driven by retail shareholders, and speculators, since large participants are usually more disciplined in entering at considered consensus prices.
A bearish engulfing candlestick on June 12 warned of trend reversal, and a profit-taking retracement.
A sequence of falling candlesticks (corrective move) has now carried the share-price to test support at the 61.8% Fibonacci level at $1.55. Should this support fail to hold, the next support is the long-term one at $1.50.

Daryl Guppy’s Multiple Moving Average (MMA) graphic.

Technical analysis is not a discipline for predicting the future. Rather the charts displayed are a visual tool for following market forces, and for making inferences about market trend and sentiment. The weakness of TA is in the human error of the interpreter.

Daryl Guppy is a renowned Australian technical analyst, a prolific writer, and one in demand for training sessions and presentations. In addition to finding fresh angles on known technical points, he is a leading thinker and innovator of ideas he incorporates into his own trading (since 1980). They are not just theory.

The MMA chart he developed is not really an indicator. Rather it is a graphic (like a basic chart) for “eyeballing” and gauging what the market is thinking about fair value for the share-price over time.

His literature should be consulted for a full exposition of its use. In brief however he has made the logical (I think) deduction that there is a dichotomy between the valuations of short-term traders reflected in the short moving averages (3,5,8,10,12 and 15 day moving averages) and those of investors (30, 25, 40, 45, 50 and 60 day moving averages).

Short-term traders and speculators will take their exit and entry cues from the cross-over of the short averages. For those who are in for the longer haul. the short averages should be discounted and instead delay exits and profit-taking until cross-over of these longer averages. This enables them to avoid being distracted by day-to-day volatility and to stick with their positions for continuing profits.

The MMA trace is helpful in defining what market participants may be thinking. It may help investors to decide whether it is now opportune to enter a long position with Melbourne IT.

Profit-taking initiated retracement.
Investors not exiting.

Technical observations on MMA chart

the convergence of all short and longer-term moving averages at around May 21 suggested a suitable time for entry, even although the short and longer term averages did not cross-over.
convergence, following divergence, of the short averages, and progressive cross-overs, provided a series of signals for short-term trading exit.
the last candlestick has now penetrated the zone of the still diverging longer-term averages, and their rise has plateaued, but no cross-overs have occurred suggesting that investors are not exiting.

Conclusion

Investors holding long positions in Melbourne IT need not at this stage feel concerned about continuing to hold their stock.

Those looking for entry may find the next day or two appropriate to open a long position.

I should add that I am not qualified to give investment advice. This post should be regarded as being of general information only and readers should seek professional advice elsewhere.