Happy New Year – and for what it’s worth (perhaps not much!) I think this year will be better. Of course, I could be wrong, just as the smart money was last year. Barclays predicted a close of 3,675 for the S&P 500, Societe Geneérale went for 3,800, with Morgan Stanley, UBS and Citi all at 3,900.
And yet the S&P 500 closed at 4,770. All of them were not only wrong, but very wrong. So if those with a bigger bankroll, bigger team and bigger brains than me can be so wrong then what chance do I have? As I said earlier, perhaps not much. I go by charts, and in November and December stocks were rallying. Breakouts were holding and advancing, with many stocks making material gains. Add in the fact that inflation looks to have peaked and that there are rate cuts on the horizon, and this stimulates sentiment as the market is forward looking.
My opinion is that charts rule. If stocks start falling and the market can’t catch a bid then I need to change accordingly. Far better to be wrong and keep my account intact, than go bust trying to be right.
One thing I’ve noticed is that the number of stocks that are showing up on my 52-week highs filter is slowly increasing – meaning that the general trend is improving for the better. This is bullish because it means breakout patterns are now more likely to work because stocks are printing higher. The breakout pattern is my favourite pattern and best suited for early-stage bull markets and euphoric bull markets (although caution is required with tight stops for the latter).
If we’re entering an early-stage bull market, which I believe is the case, then swing trade breakouts rather than scalp breakouts will be an effective strategy over the coming months. The US is already in a bull market with the Nasdaq closing 43 per cent up in 2023, along with the S&P 500 posting a 26.3 per cent gain and finishing within 1 per cent of its all-time high.
The signs are there. And according to CNN’s Fear & Greed indicator, the market is now at ‘Extreme Greed’ with a 75 rating out of a possible 100. Therefore, any pullbacks should not be unexpected, but how the market reacts will be telling. If we see dips happily lapped up and stacked order books on the bid side, then it’s not unreasonable to expect share prices to go higher.
One stock I’m watching for a potential breakout is Yu Group (YU.). Yu is an independent supplier of gas and electricity to small businesses in the UK. It is not involved in the domestic retail market and is purely business-to-business (B2B). It has two operating segments: the supply of energy, and the installation and maintenance of its energy assets.
The stock listed in the spring of 2016 at 185p a share. Within a year, the stock had printed above 1,400p per share before an accounting issue sent the stock to below 100p in 2018.
Chart 1 shows the damage here and price action as the stock traded in a tight range for two years.
Whenever stocks trade in extended ranges, that signals to me that the stock is building a stage one base. This is the first stage before stage two, the advancing phase, but stocks that are in stage one do not necessarily break out into stage two. A stock that has trended in a stage one base for many months may have bad news and re-enter stage four.
But if the fundamentals are improving yet the stock price remains in a range, this can be a huge catalyst for a big breakout and bull run in the stock. And these are the types of patterns that we should be looking out for because they can provide the biggest winners.
Moving to Chart 2, the bottom arrow shows the stock breaking out of a near two-year base. It then went on a rally, consolidated, and powered higher.
The top arrow marks the breakout point I’m now eyeing up as the stock forms a potential cup and handle. However, because the stock has rallied sharply within the past six months, I’d be utilising a tight stop here.
That said, the company’s last results showed adjusted Ebitda to be substantially ahead of current market expectations. Should this trend continue, there could be future upside in the stock. But it’s important to remember that adjusted Ebitda does not equal profit. Although the company says it is expected to exceed £33mn for FY2023, net profit came in at £7.31mn.
If we assume no growth, then this would be £14.6mn for the year, equating to a price/earnings (PE) ratio of just under 14. For the growth on offer, I don’t believe this to be a demanding rating, although if things were to slip up then there is a lot of paper profit yet to be crystallised, and there would be a crowded rush for the exit in the event of any bad news.
I did a management call and found the directors likeable, and given chief executive Bobby Kalar holds over 52 per cent of the stock, he is motivated to see a big return. But that in itself is a risk, and just because directors seem pleasant doesn’t mean anything to me. This is purely a breakout trade on momentum, and I won’t be sticking around if the price goes south. I hold a small position, with a view to increasing should the stock break the highs of 1,260p. My stop is below the recent lows of 1,190p.
