Happy New Year! I high have hopes it will be a good one – for trading at least. It’s lockdown everywhere now, but I’m not sure what has changed – Tier 4 already meant that I couldn’t do anything and now a new lockdown again tells me I can’t do anything. However, the big question now is whether this is the lockdown to end all lockdowns – or will the government botch the distribution of the vaccine and the new strain cause more angst?
It is, of course, easy to be critical when 1) the facts and figures aren’t fully known, and 2) one is not making life and death decisions. In 2008, when General Electric saw its financing decision collapse and its stock price plummet, the chief executive was lambasted and told it was obvious what he should’ve done. He wrote to his successor: “Remember, every job or decision looks easy until you are the one on the line.”
It's easy to say now that I should’ve piled in on the bounce and nailed my hands to the table. It’s easy to say now that it was obvious global governments weren’t going to let the global financial economy grind to a halt – after all, they propped it up in 2008. Many a money manager underperformed in the early 2010s because they believed what the Federal Reserve was doing was “unsustainable”. But what is and what could’ve been are two different things, and we must look forward to the future.
It’s always worth checking your trades and how they performed. It’s also worth checking how they did after you closed them out to make sure you’re not leaving ample money on the table. But don’t fall into the trap of believing that everything could’ve been predicted.
Looking at Chart 1, we can see the price action of Gym Group (GYM) from the start of 2017. We can see that the stock was uptrending, having bounced from the 200-day exponential moving average in April 2018 (pink line) where I’ve drawn the first arrow. This confirmed the trend, and it bounced again in October 2018 with the second arrow from the left.
The trend was broken when the stock failed to break its prior high, and then fell through all the moving averages. I’ve marked this with the bigger downward-pointing arrow. The 200-day moving average is a useful indicator to check the overall trend.
In bull markets, a stock that is trending below its 200-day EMA is suspect. It’s widely accepted in technical analysis that a stock trading below this moving average is downtrending. Therefore, if you are wanting to go long on a stock, check this indicator first. This is not an investing column, but I personally believe that investors should always check the chart before buying into a company. Remember, we can enter and exit positions relatively easily unless we are heavily buying an illiquid stock, in which case you may decide you want to buy into the downtrend because of liquidity issues (there can be little stock around when everyone wants to buy).
This indicator would’ve helped both traders and investors alike exit Gym Group when global equities crashed last year. If you were quick to act, you would’ve avoided a large drawdown on the position, as the stock plumbed lows of 80p.
Since then, the company placed 19.9 per cent of its equity with investors at 150p a share. It’s now well financed, and has a debt facility offering further funding if it needs drawing on too. The new lockdown isn’t great news for The Gym Group – but management hopes to use the strengthened balance sheet to capitalise on opportunities and grow the pipeline.
When I lived in Germany the dominant player in this market was (and still is) McFIT. It operates a low-cost leadership strategy, and opened large gyms in high-footfall areas. By doing so the gym had a large potential audience and was also easily accessible – driving to a gym is a good excuse not to go (so much so that in my old house I turned my garage into a fully-equipped home gym).
This model works, and it’s one I notice Gym Group also operates. However, competition is fierce, with PureGym and other low-cost business all seeking to replicate McFIT’s success. The Gym Group has acquired several brands, and has a strong foothold across the nation. I feel that it could be a good trend trade opportunity if the stock can break out of its recent high.
Looking across to Chart 2, the stock looks as though it has been building a base on elevated volume. It now trades above all the recent moving averages. The stock has formed the first part of a handle – will it complete the cup-and-handle pattern and break out of the 240p high? The stock has also tagged the 50-day EMA too (black line), and so I’d mark this level as support. Ideally, I’d like to see the stock continue to consolidate, and the trading range begin to narrow. This has two benefits: firstly, a narrow range means a contraction of volatility, and the likelihood of an expansion of this volatility. Secondly, we can place a much tighter stop, and adjust our position size upwards to take this smaller risk into account. Not all position sizes and stops should be equal, and we should look at each trade individually and assess the risk/reward through looking at the chart.
What I wouldn’t want is for the stock to make a sharp move upwards and break through the 240p level quickly. This can provide great opportunities, but with many market participants so quickly in profit the pullbacks can be larger. It’s better – at least in my opinion – to trade from narrower ranges and tighter stops.
- Michael has released his UK Online Stock Trading Course. Investors Chronicle readers can download Michael’s book and learn more about the course by visiting www.shiftingshares.com/online-stock-trading-course
- Twitter: @shiftingshares
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