Blue Prism (PRSM) is a company that is engaged in robotic process automation, and licences software to other companies that are able to automate routine back-office administrative tasks. It sounds exciting, which may be the reason for its stratospheric share price rise in recent years.
It’s a company that – like Ocado (OCDO), which we looked at last week – has yet to make a penny in profit and yet has been a huge winner for trend-following traders. The trajectory resembles many of the US growth companies, as investors there tend to focus on revenue acceleration, unlike usually more conservative Brits – a mindset that might explain why our FTSE 100 consists of a few long-in-the-tooth oil companies, banks and telecommunications companies rather than the revolutionary FAANG stocks.
It’s also worth highlighting here that the ‘smart money’ who shorted Blue Prism all the way up have lost their shirts. If there is one lesson I have learned in my trading career, it is that my opinion is worth nothing. Should you choose to try to impose your opinion on the market, then you’ll soon find out that having an opinion is an expensive hobby and that it’s far cheaper (and more profitable) to either not have an opinion at all or have the ability to change your mind quickly. The market doesn’t care about my opinion, and it doesn’t care about your opinion either.
The problem with opinions is that traders can often become married to them. This is costly in terms of the profit and loss, especially if a strong opinion becomes a part of a trader’s identity. When this happens, any refuting information is rejected in favour of information that confirms the trader’s bias. They see it as an attack on their identity. The day you stop carrying your bias, and so stop looking for a narrative to support your view, is the day you are finally free and ready to make money. Good traders actively seek out those who are taking the other side of the trade because they want to know what can hurt them.
Let’s look at Blue Prism’s chart. Its shares rose from 100p in 2016 to a high of just over 2,600p in 2018 – not a bad return for those who were long, but a disaster for shorters. The turning point came on 13 September 2018 when the Financial Times let fly with a scathing piece on the stock. None of the information in this article was anything new; in fact, people had been saying everything in the article for years. But this article was the straw that broke the camel’s back.
Looking at Chart 1 – the day of the article’s release – we can see that the stock began to trickle downwards, and pick up speed in a snowball effect due to a mix of more shorters joining the trend and stop-losses being cleaned out. In just under two hours, the stock had fallen nearly 30 per cent on the day. Yet it rebounded to close just a few percent down. No doubt many investors opened their broker accounts at the end of the day to see nothing out of the ordinary in Blue Prism aside from the fact that they no longer held a position.
However, volatility is often a key marker of a change in trend, and I warned on Twitter that the stock was now coming into play for shorters. Since then, the stock has failed to come anywhere near that level. Whenever you spot high volume and high volatility in a stock, it means that the price trend may be changing. High volume means high interest in both buying and selling, and high volatility represents market indecision. This is why we are seeing huge moves and volumes going through many stocks at the moment, as uncertainty leads to a spike in activity. For traders, this is an amazing opportunity.
In Chart 2, we can see that Blue Prism has been rangebound since November 2018, consistently tagging the support and resistance zones identified, and offering many trades from these levels. We can also see that the stock has built a support zone at 800p, having tested this level repeatedly throughout November last year and also in the recent sell-off last month. There is a volume spike on the chart in the middle of March, which again shows high interest in the stock.
I believe there are two potential trading opportunities here. First of all, a breakdown of the 1,000p level would then see traders looking at the 800p zone as support. Should that fail to hold, the stock would be printing new lows not seen since the summer of 2017. When a stock breaks through a significant level, it’s a sign that the price action and trend could be significantly changing.
Since the start of 2020, we have seen the price rise from 1,100p to 1,900p. This is a volatile stock, and we should be prepared for large moves either ways.
One of the problems investors have here is that the company has withdrawn its financial guidance to the market. It also says it has put in place a hiring freeze, and had a cash position of only £42m on 27 March 2020. Given that the company burned £57.9m in operations and blew another £46.7m in investing activities in 2019, it’s hard to know exactly if or when Blue Prism will need to get the begging bowl out again.
In bull markets, investors are willing to fund all sorts of hypergrowth companies. We only have to look at last week’s example of Luckin Coffee (US:LK) to see how easily the smart money can be seduced. But those purse strings are tightened in bear markets, and should Blue Prism break through 800p it may be worth holding the short position knowing that the company could be tapping the market for cash.
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