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The 5 Phase Trade: Lesson 4

/The 5 Phase Trade: Lesson 4

My Explanation

 My Interpretation of “Why a five phase trade?”

 

Phase One

 

The Build Up. This is the initial euphoria wave when company directors come up with a new idea, often joining into the latest trend. It may be a move into uranium, gold, nickel, mobile phones, medicine, waste disposal or whatever the latest fad or new technology may be. Whatever it is, there is a move afoot and a feeling of excitement.

 

Phase Two

 

The Entry. The Educated Investor enters the market. This is the action phase as the company starts doing something like digging, drilling, exploring or perhaps inventing. This wave is usually accompanied by positive announcements from the company.

 

Phase Three

 

Wait and See. Perhaps some doubts set in as funding runs low or questions are raised about the viability of the project being undertaken.

 

Phase Four

 

The Exit. The Doctors and Dentists phase. This somewhat derogatory term is applied to the final phase as generally the last of the private retail clients hear the rumours and get the hot tips and buy when it is possibly too late. This is a “boom or bust” phase as projects either bear fruit or wither on the vine. Typically it might be that the company drilling for oil is either successful or it’s a duster and prices will either skyrocket or collapse.

 

Phase Five

 

Revision and Rejoice. Given that the exit is during phase four of this trading method, the only thing left to do after Phase Four is to revise all aspects of the trade and hopefully rejoice in your success.

 

 

 

 

 

 

 

Who influences the market?

 

In terms of influencing the price of spec stocks in the resource sector, it is usually the geologist who sees a sample first. News will leak to friends, relatives and others within the company. This is unavoidable. Once these people start to place orders, brokers will see this and start telling their clients. Let’s look at an example. It may be an old example but it is indicative of any era. Some things never change!

 

Example

 

This example is a snapshot of the chart of a little Company called Pocketmail Group Limited (PKT) showing the data as at the close of business on the 11th January 2007. PKT no longer exists. Note the general sideways movement from September 2006 to the current day January 11th 2007. Nothing significant in the price but the lower half of the picture shows the volume and the unbroken line is on-balance volume.

 

Note the volume over the previous seven trading days averaged around 4 million shares whereas the average per day over the seven trading days prior was 700,000. The on-balance volume indicator is showing clearly that the buyers are in control of this stock at present. No amount of research would find any reason for this.

 

 

 

 

 

 

 

Suddenly – The very next day, January 12th, 28 million shares are traded and the price bursts upwards, trading as high as 3.3 cents but closing off the highs at 2.9 cents.

 

 

This sudden and dramatic volume increase was enough to bring a query from the Australian Stock Exchange – a “Please Explain” or as those in the industry call it “a speeding ticket”. Unlike the speeding ticket of another kind, these ones do not attract a fine or any demerit points, just a happy grin from those who have purchased the stock. Not surprisingly the response from the Company was similar to that of Sergeant Schulz from Hogan’s Hero’s – “I know nothing!” As you can see from the following printout from the Etrade website nothing much had been happening with PKT for a while and the Company had no news to report to the ASX.

 

The Next Ten Days

 

The next ten days remained pretty quiet with volume drying up again and the price movement quite limited. But notice the continued rise in the on-balance-volume – the buyers are not only in control but increasing the buying pressure. Whether this is fresh buyers or more accumulation from previous buyers is irrelevant to the trader. The price has now been as high as 3.6 cents on the 17th January and the current close is 3.3 cents.

 

Monday the 22nd

 

Away goes the price for another gallop, gapping up on the open and closing on the high at 4.9 cents.

 

…and finally the announcement. Late on Monday 22nd an announcement is made regarding the acquisition of a Uranium Exploration Company. This stock was trading at 2 cents on the 3rd January and moved to 4.9 cents before an announcement was made.

 

 

 

 

 

 

Conclusions

 

I have run through the trading in PKT in some detail as I believe there are many lessons to be learned. An occurrence like this happens quite regularly, particularly in the junior explorer stocks. When you get to recognize the footprints of other market participants it becomes extremely profitable information.

 

If you are going to take advantage of this type of opportunity you must develop a sound trading plan. You require an entry signal, an exit strategy, a lot of discipline and very good risk management. It should be clear that you will find these opportunities by looking at charts, not by reading newspapers and market announcements.