Keeping an eye on a smart opportunity

Day trader Michael Taylor gives his thoughts on the current market situation, and reveals a neuroscience specialist he has his eye on

March 16, 2022

by Michael Taylor

Another two weeks has passed and this awful war rages on. Putin has turned Russia into an untouchable investment. In my last column I wrote about my fears that suspension was a likely possibility for Russian stocks – that has proven to be the case. Russia has been seriously weakened by this war and it will push the country closer to China. China will be able to take full advantage of Russia’s position by harvesting its natural resources for a discount price and selling it technology and other products at higher prices. I believe this has now pushed the world closer to world war

Do I believe that a nuclear war is imminent? No. Would I change what I’m doing if I did? Also no. If a nuclear bomb were to be dropped on London – my trading account would likely be the least of my worries. But do I think that this war is going to dramatically change the world? Yes.

One thing that is becoming clear to me is that the average consumer has no idea of what is going to happen. They think energy bills will go up slightly. They think life will carry on as before, just like it did pre-Covid. Well, that is just not going to be the case. The supply chain issues and fallout from Covid are nowhere near digested. And Russia has poured fuel on the fire. Everything is going to get more expensive. That means less money in consumers’ pockets. That means products and services that are nice to have but not necessary will be first in the firing line. The dream of going back to how things were pre-Covid is just that.

Traders who are heavily long commodities will be pleased with themselves. This is because commodities are essentials, and I’ve rotated myself into commodity names over the last few weeks. While others have been selling out of the market I’ve been buying heavily. This is not me deliberately being contrarian – I trade the set-ups as they appear and with many commodity names breaking out, I now have a book full of commodity longs.

Traders have to adapt to market conditions and go where the action is. There’s no use being stuck in a stock that isn’t moving because dead stocks that aren’t trending aren’t any good for anyone.

This is why I often prefer to buy stocks when their prices have risen. Buying at a higher price where resistance has been broken means I’m buying a stock that has a likelihood of continuing in the direction of travel and is now in-play rather than sat around dead.

One stock that is on my watchlist is Cambridge Cognition (COG). Cambridge Cognition is a neuroscience digital health company. If, like me, you were none the wiser when you read that, what the company does is help detect early signs of cognitive impairment and help in cognitive trials.

The business has been listed since 2013 and has been a rollercoaster of volatility for shareholders. The price fell from a high of 170p down to as low as 19p in the Coronavirus crash.

One thing I look for in potential turnaround trades is change. Preferably a change at the top – having the same underachievers at the helm is of no real interest as things are likely to continue as they are. The company brought in a commercially focused chief executive to start driving revenue in the business. The company also placed equity to shore up the balance sheet with the intended goal of getting to cash break-even and profitability. But, most importantly, the trend has begun to change.

Chart 1 shows the decline and turnaround of the stock. Notice how in April 2020 the stock held the line around 20p before starting to advance. When a stock is up 100 per cent off its lows then it’s a strong sign the trend could be changing. For the stock to remain where it is, then demand needs to be higher than supply. And if there is no abundance of supply coming into the market to overpower the demand then it’s clear that selling pressure is easing or has eased.

I should’ve taken my position around 45p when the stock first broke out. I started buying the stock in the low 50s and increased my position on the breakout (bottom arrow) at 60p. I then added to my position in the 80s. By adding to winners, I ensured that more responsibility for my trading account was going to a name that was performing well – this is how it should be. After all, you don’t want to water your weeds and pull your flowers! I didn’t sell at the top, but I did liquidate my position when the warning signs started to show: heavy pullbacks and a moving average support break-down. Profits aren’t profits until they’re banked.

That said, despite having no position, I think this stock could still provide a winning trade. It’s rallied nearly 10-fold from the lows and so it’s unsurprising the stock needs to consolidate and cool off.

Moving across to Chart 2, I’ve marked an arrow where I’d looking to get long again on the breakout of the all-time high.

This is dependent on the stock continuing to execute fundamentally (it is now profitable and self-sustaining) as well as the price gently trending upwards towards the resistance zone. I prefer the sharp moves to be after resistance is broken rather than rallying up sharply towards the resistance.