We’re finally now starting to see the cost of living crisis start to bite. Two weeks ago Naked Wines (WINE) announced a profit warning which downed the stock by 50 per cent. This is despite it being one of the most shorted stocks on the exchange. Lots of shares have been routed in recent weeks. For investors, it’s going to be tough. Nobody likes sharp drawdowns. But it’s also opportunity. And for traders, opportunities are plentiful so long as you stay on your toes. There may be 2,000+ stocks on the London Stock Exchange but only a handful are needed to trade profitably. Finding short-term short trades while keeping a lookout for the next longs that are breaking out of consolidated bases is a good strategy.
The summer period is generally quieter but this is a time to keep up the research. Nobody knows when the market will turn. It could be in two weeks or two years. But what I am sure of is that the new market leaders will show themselves in good time bottoming before the market and rallying on volume well before the indices start making a move.
I’m a firm believer in trading the trend. This is because you are playing the odds in your favour. Simply put, if a stock is trending upwards, then buying a breakout means you are going with the consensus. Going with the consensus view is often a good idea – fighting the market can be foolish and costly. The flip side is that if you have an excellent reason as to why the crowd is wrong then you may’ve just found an exceptional trade. More often though, if everyone wants to sell a stock then in my view it’s impossible to know when the selling will stop. You may be able to put a price on what the stock is worth, but the stock market runs on two things only: fear and greed.
If it wasn’t, then extreme valuations wouldn’t exist. Stocks wouldn’t trade at 20x revenues, and people wouldn’t pile into the SPACS. Did the Gamestop (US:GME) squeeze happen because the stock was intensely undervalued? Or did people do it for the laughs? It was a time where people had far too much money to gamble, and assets backed by money printing asset prices went crazy. It was fun but all good things come to an end. Those who entered the market from March 2020 onwards have likely blown the lot, and now it’s those who will see the market through to the new early bull stage that are left.
We last looked at Restaurant Group (RTN) in February 2021 ‘Prepare for Covid-cues’ (3 February 2021) – it was a big mover on Vaccine Day and it also traded in a cup and handle.
Here’s the chart and how it played out.
We can see that the stock bounced off 40p several times providing support. However, it couldn’t break out of the 75p high. That told me that both of those levels were significant support and resistance zones, and that if the stock either broke down or broke out it would be likely to make a move.
We saw the stock breakout and gain nearly 100 per cent in just a few months from the breakout. This is the power of trading simple support and resistance. When those areas are tagged several times then you can have greater confidence in the move.
But fast forward a year and a half and the company’s stock price chart is now looking significantly different.
It’s well off the highs and is a living victim of the cost of living crisis. People are saving money. People are eating out less. Inflation is eating into pockets, and the outlook is grim.
The cost of living crisis doesn’t tend to affect the wealthy. It’s the middle classes and the poor that take the hit. And Restaurant Group has accessible brands for the masses. And while it has the option to tap shareholders for more cash, that does not take away from the fact that the business is facing significant headwinds for the foreseeable future.
Nobody is focusing on energy bills for now. It’s summer. Most people have their heating off and so it’s possible the rise has gone unnoticed by many. But come October when energy bills rise as least by 25 percent, coupled with the cold winter weather, this is likely to come as a shock for many people. This will decrease consumer discretionary spending rapidly as people realise how much their costs have risen.
For these reasons then, shorting Restaurant Group seems like trade that has the macroeconomic environment in favour.
I’ve previously shorted this stock when it went through 60p. But it’s 40p that is the big marker here.
40p is the significant support on the chart that has held thrice, before the stock broke out and went on a run.
I’m looking at this level to go short. The stock also currently trades on 19x forecast earnings which seems expensive in this market. If the company does beat its expectations, then there could be a rally in the price which may force shorts to cover. You can avoid this risk by not shorting directly ahead of earnings.
Michael has started his Buy the Breakout newsletter which contains trading ideas and tips he has learned while trading. You can subscribe for free at his website here: www.shiftingshares.com
Twitter: @shiftingshares
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