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Trading momentum in the gambling sector

Michael Taylor explains why he thinks it's worth keeping a close eye on stocks in the sector in anticipation of more upward moves
October 1, 2020

William Hill (LSE: WMH) revealed last week that the company had been the recipient of two separate cash proposals from both Apollo Management International and Caesars Entertainment. This stoked the price up over 40 per cent on the day from 220p to 312p. Other gambling stocks also began to move such as 888 (LSE: 888) and Flutter Entertainment (LSE: FLTR). Whenever there is a takeover in a specific sector, the market anticipates there is more value to be unlocked within other industries. This is the cheerleader effect in action, which is also known as the group attractiveness effect; the cheerleader effect is the cognitive bias that sees us believe individuals are more attractive when they are in a group rather than alone.

Very often the recipient of the bid – if announced intraday – will gap up into auction as the trading price threshold is crossed and the auction is automatically triggered. This is of course assuming the recipient is traded on SETS. If the stock that has announced a potential bid offering is traded via the market makers or on SETSqx, then it is sometimes possible to catch the market makers asleep at the wheel if you’re quick.

It has happened many a time that there has been good news announced and immediately the stock is not able to be bought or sold online. It can be that I have a dealing ticket and a quote sent to the market easily within 20 seconds of the RNS being released and yet the stock is unable to be dealt. I have wondered if market makers have an automatic dealing halt on certain stocks as they release an RNS, as a market maker can be caught out in a fast-moving market in an illiquid stock. However, it’s likely we will never know. But if you do see a bid RNS and the market makers fail to adjust their pricing, allowing you to deal before the price has even moved, you can be quietly pleased with yourself on a speedily executed trade.

Looking at Chart 1, we can see the price action of William Hill since the turn of March.

I’ve drawn an arrow where I entered the stock for a trade. This was because volume was incredibly high and the stock had fallen from close to 200p down to below 30p in just a few weeks. There was a doji candle that printed, a sign of indecision in the market, and many stocks had stopped relentlessly falling. From a technical perspective stocks were beginning to look oversold, and when stocks are heavily oversold there is often a snapback rally. This is sometimes known as the ‘reversion to the mean’ trade, which is where a stock that has been heavily bought and risen high into the stratosphere will retrace and give back some of the move, or where a stock that has been hammered down will see a bounce trade in the form of a quick rally.

Indeed, this was the case with William Hill, and I began selling into the move closing my position with the last of my stock at around double the price I had paid for the shares a few days earlier. This was a great multi-R trade. R is our risk on the trade, and as traders our goal is to capture multiples of our risk. For example, if I have defined my monetary risk amount as 1R my goal is to make more than 1R over time in order to be profitable. However, I unfortunately did not trade William Hill again. I consider this a big mistake on my part as although I nailed the bottom I did not catch any of the future gains of the stock.

If we look at the red line of resistance I have drawn on the stock this would’ve been an excellent cup and handle trade. At the time, cup and handle bottoms were forming on many stocks and these were consistently making me money. Many pointed out that cup and handles should only be used on bullish stocks and that trading gurus such as Mark Minervini would never trade these patterns on such bombed-out stocks. But here is the thing about trading: no day is ever the same. Nobody knows what is going to happen. Books written on trading the market were written before the greatest collapse we have ever known. It’s up to us to work out how to turn our ideas of the market into profit. Put simply: if something works, then do it. It doesn’t need to make sense. Sometimes the best trades never make any sense.

With everything going on in March I could forgive myself for missing the cup and handle trade in Chart 1. But there is no excuse for missing the trade in Chart 2.

I have drawn a line from the previous high across the stock. If we look in August the stock begins rising on increasing volume. This was the first clue that the stock could be about to trend. The stock then tousled with the 200 exponential moving average (pink line), before rising to test the resistance.

From then on it was a clean break and a gentle trend above the 8 EMA (blue line). We then saw a gap up and then a few sessions later the bid announced. I almost certainly would’ve sold into the gap had I been long as this would’ve been another multi-R trade. While we should run our winners as traders, there is never any harm in taking profits from a big move. A profit is never a profit until it is banked and taken from the table. Even though it looks like William Hill at 272p in cash per share is a done deal and the story over, there is still momentum in the sector. 888 announced-better-than expected results this week and the stock continues to rise. I believe it’s worth keeping a close eye on stocks in the sector for more upward moves.

 

  • 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 (ending September) by visiting www.shiftingshares.com/online-stock-trading-course
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