I recently headed into the City to meet up with the editor for a few drinks. As he’d written before, it’s a ghost town. Another piece in a recent Evening Standard observed the same thing, pointing out the relationships the Square Mile helps lubricate and worrying that London could lose its competitiveness against cities such as Frankfurt and Brussels. I’ve lived in both Frankfurt and London and I don’t agree; there’s no soul in ‘Bankfurt’, whereas the City is (or was) thriving with activity, and that’s always been part of its competitive advantage.
As much as the armchair economists and efficient market advocates may argue against it, business is done over lunches and drinks. Working from home removes this element, and while many businesses have successfully made the jump to remote working, things aren’t always quite the same. Take broking, for instance. I have a good relationship with one of my brokers, and I’ve always been able to rely on them. Previously, I would call up, place the order, and my broker would shout the order to the dealers, who’d then call the market makers, execute, shout back to my broker who would then tell me the result on the phone. It was fast, and the dealers would push back to the market makers and not let them walk over them, so I’d get better execution than at other brokers. This process costs me £50 per trade. It’s not cheap, but there is a clear value proposition, and if you want to be in or out quick then this fee can actually save a trader money. Some brokers will be sweet to the market makers, and some brokers will use their clout to push for a better deal for their clients. Not all brokers are created equal.
Since coronavirus and working from home, when I call this home-based broker now, he then puts in a ticket, which is then picked up by the dealers. This simple step has lengthened the process, and on occasion it can be several minutes before my order is picked up. I used to place market orders knowing that the order would be complete within a minute and therefore the price had not ticked up or down too much. However, now I am finding that sometimes it can take several minutes for a fill, in which case either the price has moved or I am selling at terrible prices. As well as that, I’ve had clients in front, meaning that there are clients of that broker already working orders ahead of me, and so I’ve seen an increase in my buys and sells not being filled. This could be due to an increase in volatility, meaning more clients are trading, or it could be something else, but what I do know is that my execution has become sloppier as a result, and needs evaluating.
Execution is everything in trading. Especially in short-term moves – sometimes seconds matter. The first person to call the market maker in the pre-market may get competitive stock, the second person may not. If there are ample sellers at 08:00, then the price may well have changed for the worse at 08:01. The takeaway here is that if you’ve noticed a change or slippage in execution, then you need to act. Relationships matter, but business is business. And that’s how you should treat your trading account.
Onto the charts, and this week I’m looking at Auto Trader (AUTO), which has been a big success since listing. It benefits from a similar network effect that has made Rightmove (RMV) so fantastically profitable. The more eyeballs on the platform, the more attractive it is for vendors and sellers, and thus in turn increases the attraction for buyers. Looking at Chart 1, we can see that the stock had delivered fantastic returns. One of the reasons I believe investors should look to trade along the side is because many stocks trend sideways for extended periods of time. Autotrader quickly ran up within the first nine months, pulled back, and didn’t break its high until around three years later. That’s a long time to be waiting.
At the turn of the year the stock was threatening to break 600p. However, we know what came next, and so if we look at Chart 2 the damage in the stock has been nicely recovered. Perhaps, despite Covid, people are still willing to buy and sell cars. I’ll be selling my own next month and it was this that prompted me to take a look at the chart. Trading ideas can certainly pop up in our daily lives.
The stock has formed almost a V-shaped recovery, and I’ve drawn an arrow where the volume appears to have spiked and the stock put in a bottom. On the right, I’ve drawn a resistance zone in red, and the stock is carving out a shallow bowl, having tested the purple 200-day exponential moving average. The fact that this has held is bullish, and I want to see the stock continue to gently trend up towards the resistance zone.
Ideally, I want to see the price push past this resistance zone on large volume, although one potential issue I see is the clear resistance not far ahead at 600p. The stock has tested this zone multiple times and so I see it being a key price action area.
If the stock can break out of the cup and handle, I’d like to take a long position. If the stock can break the 600p area I intend to add to this position, as from then on it’s blue skies ahead and into all-time highs. Remember – by averaging up, we are rewarding winners. This follows the old stock market saying: cut losers, and run your profits.
- Michael has released his UK Online Stock Trading Course sharing his knowledge and how he trades the stock market. Investors Chronicle readers can take advantage of an introductory offer by visiting www.shiftingshares.com/online-stock-trading-course
- Twitter: @shiftingshares
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