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How to trade bouncing Burford

Michael explains why shares in the controversial litigation financing firm are on his watchlist
June 11, 2020

What a difference a few weeks makes. Not long ago, everyone was predicting doom and gloom – I was also feeling rather bearish myself. Yet I have been buying stocks like they are going out of fashion. Is this because I’ve changed my mind? Well, yes and no. Yes, in the sense that I am currently bullish on stocks, and no because I still believe there will be economic pain and misery ahead for many. But – as I have said before in this column – it makes no sense to try to make sense of it all. 

Take Carnival (CCL) for example. This stock has been buffeted by bad news after bad news. Every few days, the company has been announcing further delays to restarting its cruise lines. But despite this, the stock has held firm and even rallied. If a stock keeps taking bad news like a heavyweight boxer takes punches and still stays standing, that’s not a stock to short – in fact, you ought to be thinking about going long. 

And so, with many stocks breaking out and gunshot noises alerting me to new highs on my platform, I am trading what I am seeing rather than what I would like to see. Perhaps at some point we will find bids start to drop, and then it will be time to reload the shorts again. But while the bull is raging I intend to keep pace. Keep your stops tight, because volatility can swing both ways. It’s not unusual for markets and stocks to gain 20 per cent, give back all the gains and more, only to then rally harder. Trading long and short allows us the opportunity to continuously put gains on the board.

One stock that I am looking at is Burford Capital (BUR). Last August on our podcast (Trading Secrets, 1 August 2019), I warned that investors should be wary of this company as the price action was suspect. 

Looking at Chart 1, we can see how the chart had kept putting in lower highs, and had not been able to break out. The stock heavily sold off twice on good results (a clear sign of institutional selling), and had struggled to make a new high for over a year at the time. The stock then began to trend below all its moving averages, which is often a bearish warning. 

If a stock is not showing strength, there’s usually a reason behind it – we may not know what it is, but it’ll be revealed to us eventually. Take minnow Be Heard Group (BHRD), which was up over 70 per cent by 11am one day earlier this week. The price failed to break 0.5p, and less than an hour later an RNS appeared stating a possible offer at 0.5p. Coincidence? I think not. 

I said I would take a short position in Burford if the price broke down through the support line drawn on the chart. It did break down, but sadly I was unable to get any borrow to short the stock – an odd situation given that at the time the company was a multi-billion-pound capitalised company. It’s easy to say with hindsight that I should have tried harder and pushed some of my brokers to take the trade, but in this business one is always learning. Given the hundreds of discretionary decisions a trader is faced with daily it’s no surprise that mistakes are inevitable – we live and learn. However, making the same mistake over and over without doing anything about it is the biggest mistake we can make.

As it turned out, Carson Block of Muddy Waters Research declared a short position on Burford, which promptly sunk the stock from around 1,400p to a low of just under 400p. This was completely unexpected for me, but technical analysis had provided the warning signs. There were several red flags that alerted investors that perhaps they should be taking money off the table. 

In recent weeks, Burford appears to have been building a base, though. It’s sidestepped another pop from Muddy Waters, showing that perhaps the stock’s fortunes may be changing. 

When looking to go long on stocks that have fallen heavily, I want them to at least have made a significant move from the lows. In Burford’s case, this low was 250p, and so at 500p this is 100 per cent above the low. I entered Burford as it breached the 150-day exponential moving average (EMA) – we can see that the price tested this several times, before running up to 600p and resistance. 

I am out of the stock for now (in uncertain markets, nailing down profits into strength is a good habit), but I want to re-enter Burford should it break 600p. This would give me confirmation that the stock is being bought on dips and buyers are pushing the price higher. Uptrending stocks continuously offer breakout opportunities; if you find a strong uptrending stock, then it can pay to keep it on your watchlist. 

The story is far from over at Burford, though – and the implications are significant. Last month, its application to obtain trading data from the London Stock Exchange was rejected. The company wanted to investigate market manipulation of the stock in the period that it was being shorted. Whether or not you believe the stock was manipulated, the decision itself is important. Despite Burford bringing in an expert, it was denied, with the judge commenting that allowing the application would indicate regulators weren’t able to spot market manipulation, which would in turn encourage more market manipulation.

Unfortunately, for private investors, at least – not so much the high-frequency trading firms, it seems as though protecting the Financial Conduct Authority’s reputation is more important than the regulation of the market itself. It’s hard to imagine confidence in the regulator being undermined further, but this judgment managed it. 

 

You can contact Michael and get your free copy of Ten Habits of Highly Profitable Traders from www.shiftingshares.com

Twitter: @shiftingshares

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