Sylvania Platinum (SLP) is a company that I have followed throughout my whole trading career. It has been an inspiration to me to see what can be achieved if one follows a company’s results and not a share price. I’m often told that being a trader must be difficult, as it requires discipline to buy and cut one’s losses quickly. That is true, and there is also the necessity to continuously generate new trading ideas. But to hold a company for several years through big share price drawdowns must also require nerves of steel.
How often have you held a company’s shares and logged into your account to see a falling share price, and decided that now is a time to either bank profits or get out, only for the share go quickly recover its losses and post further gains? I would be willing to wager that this has happened at least once to all of us. Recency bias places importance on events that are freshest in one’s memory, but of course not all these events are so important in the longer term. In the example of a mining share, a short-term blip in production may see a dramatic price fall, but over the course of a year or several years it fails to register on the share price chart.
We can see an example of exactly this in Anglo Asian Mining (AAZ). On 15 July 2020, the company announced its latest production and operations review. It was a decent update, but for some reason the stock fell from 142p to 129p on large volume in early morning trading. Granted this is not a huge move, but the size of the volume and sharpness of the drop may have been enough to spook many investors and shake them out of their positions. Investors may have expected a larger drop and waited to add on a dip, yet just two weeks later the stock had recovered and was punching through its highs. Recency bias likely caught those who were wishing to add out.
In the case of Sylvania Platinum, investors may now be getting used to these grinding and gyrating. They’ve certainly had plenty of dips to get used to it. But this volatility has also been great for traders – because the stock can move relatively quickly there have plenty of potential profits up for grabs.
Looking at Chart 1 we can see that in the middle of the chart, May 2016, there appears to be a turning point. I’ve marked this with an arrow, as we begin to see a crescendo of volume sparking life into the chart. To the left of this arrow, we can see that the price of the stock would not move for several sessions, and it would gently drop down on low volume every now and again, barely ever catching a rally. This is typical of a stage 4 capitulation stage stock. We want to avoid the losers, and be long stage 2 advancing stocks.
The only justified exemption for buying a stage 4 downtrend is if you are struggling for liquidity and need to use the falling price to build a position. If one is buying a large number of shares then this indeed may be the reality. But by doing this one is nailing the flag to the mast and it will be impossible to exit without a large loss. This can be a very profitable strategy for the trader but it is high risk. It’s better, at least generally and in my own opinion, to wait for the trend to appear and jump on board when we see the green shoots starting to appear. Unless you are a hedge fund liquidity should not be an issue.
Looking at the stock once the volume picked up, both average volume in the stock ramped up as well as volatility, with sharp rallies and equally as sharp pullbacks, with a gradual uptrend over the next few months.Volume here, even if the stock is not moving much, is very interesting as it shows shares changing hands. That means those who want out are being taken out by new shareholders – new shareholders who presumably want to sell for a higher price to see some profit. It would’ve been unlikely to have been shorts closing positions because the stock was so illiquid, but this is something to look out for on SETS traded stocks.
Moving onto Chart 2, we can see the savage sell off that would test even the most resolute investor’s nerves. Even just last week, the stock sold off from 64p down to as low as 52p on heavy volume, only to rebound in the same day. However, for traders this is a sign of strength. Clearly the dip has well and truly been bought, boding well for a breakout trade at 67p.
Some consolidation of the stock here would be ideal, as the best breakouts come from long bases with sudden spikes in both volume and volatility. Ideally, it’s best not to have too much hot money sitting on a nice paper profit, as any sudden moves can see supply of stock coming into the market. Rather, a nice gentle churn allowing them to exit now and letting other people take up the slack would be a positive thing to see.
My colleague here at Investors Chronicle Simon Thompson still believes there is risk to the upside to his 100p target price (‘Manufacturing Gains’, 7 September 2020). Fundamentals are a nice thing to have, but traders should remain focused on the chart. At the end of the day, we are paid solely on the capital gains of our endeavours – not the undervaluation of the stock. I have made that mistake before and have no wish to repeat it. The price must come first.
- Michael has released his UK Online Stock Trading Course sharing his knowledge and how he trades the stock market. Investors Chronicle readers can take advantage of an introductory offer by visiting www.shiftingshares.com/online-stock-trading-course
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