This follow-up post on the small cap stock Traffic Technologies (TTI) raises a frequent issue for retail investors. This post seeks to discuss technical considerations, and is not intended to be considered as investment advice.

This is a news release that can only be considered positive for the stock yet the share price falls, defying all reasonable investor assumptions.

The announcement 17 June 2014 in Melbourne concerned a new contract for three cities in Saudi Arabia. It is the latest in a series of export orders for China, Singapore, and Ecuador; paving the way for further traffic regulating equipment orders.

The announcement.

QTC Wins $1.4 Million Traffic Controller Order

17 June 2014, Melbourne: The Company is pleased to announce that its subsidiary company, Quick Turn Circuits (QTC), which was acquired in December 2013, has now been fully integrated into the Group and has secured a $1.4 million order to supply traffic controllers to the Kingdom of Saudi Arabia. The order, which is for the supply of traffic controllers, associated software and spare parts, is expected to be delivered from late June 2014 with final deliveries in the early part of the 2015 financial year.

The cities of Dammam, Tabuk and Abha in Saudi Arabia will be converted to full adaptive traffic management systems through the implementation of SCATS (Sydney Coordinated and Adaptive Traffic Systems) and QTC’s Hadron traffic controllers. QTC will be responsible for supplying the Hadron traffic controllers and SCATS systems, as well as installation and commissioning of the SCATS Central Manager software.

Commenting on the order, Managing Director Con Liosatos said: “This order is the latest in a series of export orders which QTC has won over the past year, both before and after the acquisition by Traffic Technologies. These orders have come from overseas countries including China, Singapore and Ecuador and open up potential new export markets for the Group’s other products such as traffic signals and electronic signage in the future.”

The Market Response

TTI share-price spikes lower

Observations

• For 18 weeks the stock has traded in a range between 6.5 cents and 7 cents
• The price decline followed the above announcement to test an earlier support level at 5.5 cents.
• The sequence of three falling black candles (red here) is sometimes referred to as three black crows, this is a bearish feature.
• But on three previous occasions the share price has spiked sharply lower in this way only to rebound quickly.

MMA chart appearance

A trading dip

Observations

There has been an eight month decline in the share-price from a high of 10 cents with convergence of short and longer-term moving averages in the last 4-5 months showing a consensus of view on the share-price.

The longer-term averages have been much more stable but are still gently declining. It remains to be seen whether investors will see this spike lower as a negative and quit their long positions.

Possible Explanations

While divergence between news and market response is not uncommon, explanation is usually debateable. Possible dynamics include the following:

1. The market anticipates the news and incorporates the benefits into the share-price (buy on rumour, sell on fact)
2. The market considers the announcement to be not up to expectations.
3. The market considers that there are negatives out-weighing the positives. e.g. in this case the Debt/Equity ratio is 107%
4. Some market participants may find themselves under or over-weight in their holdings.in view of the new information. Fund managers may wish to accumulate more stock at favourable prices.
5. Traders may short the stock for profit when the expectation is for a rise in the share-price.

Suggested response

There is probably insufficient evidence to justify a stop/loss sale at present for those holding shares.

Safe entry remains above 7 cents.

For those looking for entry at a bargain price, rebound off support may afford them this opportunity, on the basis that there is probably little further downside risk.

Stop/loss position could be set at a previous low of 5 cents.

Categories: Chart Analyses, Technical Analysis, Trading opinion