N Brown Group could bring plus-sized profits

Brown (N) Group (BWNG) is a UK clothing and footwear retailer best known for selling plus-sized clothing. You may be aware of its main brands – Jacamo and Simply Be. Once an investor favourite, it’s suffered a serious fall from grace. The stock peaked in early 2014, briefly kissing 600p before collapsing faster than Covid-testing stocks on Vaccine Day.

Chart 1 shows the speed of the demise. Within eight months the stock had more than halved, and the volume had increased on the price fall too. I once read somewhere that volume kills trends, and this is something that has stuck with me. I believe volume is an indicator of a potential new trend beginning, but for that to happen the old trend must be killed off. Therefore, if the stock is up trending and the volume is ramping up – it may be that sellers are taking advantage of the liquidity to unwind positions. Remember, institutions with large amounts of stock lack the agility that we as private investors and traders do. It’s this position agility that is our greatest advantage. Unless we have nailed our flag to the mast in an illiquid stock, we’re able to get out of most stocks with just a few trades and not affect the price too much. But for an institution, selling out of a position can take days or weeks.

We can use the chart to spot this and use their weakness to our advantage.

I have marked two areas of resistance with two arrows. In the upper arrow, we can see the stock rallied after the dip on good volume. All the moving averages were trending upwards, and so it had all the hallmarks of a potential stage-2 stock. It had even doubled from its lows – a real sign of strength. Yet despite all these tell-tale signs, it failed to breakout and continued in its downtrend.In the second arrow, we can see a similar pattern. This time, the stock did break out, but it then came down to test the support, fell through it, and again continued its trajectory downwards.I’ve highlighted these to show how difficult trading can be – despite these patterns looking good technically they both still failed. Sadly, there is no step-by-step fool-proof method anyone can say works every time. But, just as a casino is set up to give itself an edge against punters in games of chance like roulette, our house edge is to keep playing what works and minimise our risk.

Moving on to Chart 2, we see things have changed.

The stock fell off a cliff in mid-January, and continued to fall all the way down until the stock rapidly bounced. This is the sort of trend short sellers dream of; the stock falls and keeps falling. And then keeps falling, and falling further. This was certainly the case in February with many stocks, as everyone was too frightened to buy, and so it was a one-way street of sellers. Short-selling fear is an excellent strategy to rack up profits.

I’ve drawn an arrow where we can see a volume spike, and we see this volume continued well into April and May, with the price flatlining. This is a sign of demand as buyers are soaking up sellers. One of the great things about volume is that it shows the market as it really is – in other words, it shows true prices. Prices that are backed by poor volume can easily be shifted into a price that is false. This is a problem – and opportunity – of small cap stocks. It’s very easy to tick a stock up or down on a buy or sell of just a few thousand pounds (a fact well-known about by bulletin board rampers and Twitter pumpers). Therefore, just a few well-timed buys can tick the stock up and show a price that has somehow added several million pounds of value to the stock with just a quantum buy of £2,000.

This is why I prefer SETS traded stocks, as they are more liquid and the prices are real. Try as you might, you will need some firepower to move Brown Group and that’s assuming no one is waiting for the price to tick up to unload. Currently, I can buy 25,000 shares within the spread – although a tell-tale sign that there is a potential sell order being worked is that I can sell the same amount well below the quoted bid. If the market makers are not buying stock, it could be because they are actively working someone’s sell order – which is why the stock may be offered attractively. For this reason, I believe it’s also worth checking liquidity on both the bid and the ask to see what the market depth is beyond Level 2 (see ‘On the Level’, 21 November 2019 and my article for more on this).

Coming back to Brown Group – the bottom red line is the resistance area I have marked. Both volume and volatility are dropping off. This suggests a new equilibrium point for the stock. The company also raised £100 million at 57p to accelerate its growth strategy. Whether or not this works or not is not a trader’s concern – buy the breakout at 65p for a good risk/reward trade. Those who followed me into the breakout at Ferrexpo (FXPO) last week are now nicely up on the trade. 

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