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 MARKET REPORTS |
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Resident Trader
Coal Powered Rocket
Will Kraa, June 02, 2008
No, the company I am going to be talking about is not making any money and the PE is hugely negative so all you fundamentalists might like to leave the room right now. But obviously there are plenty of people out there who believe it has very good potential. The company is Cockatoo Coal and they have rights to lots of places in Queensland where heaps of that black stuff is buried.
It first came to my attention in July last year when the price and volume jumped in the kind of fashion I love to see. What made it even more delicious was the way the price had been going nowhere for more than a year. There was absolutely nobody who had bought the shares at a higher price and would be anxious to get their money back. There was also a Buy recommendation from a mining newsletter I used to subscribe to.
You can see all this on the chart (weekly in this case) and it was certainly one that fitted all of my criteria. The price activity followed an announcement that the company was acquiring more coal assets and this obviously pleased the market. This propelled the price to be well above the 20 cent resistance of the previous trading range and caused it to show up on my daily scan. By the time I had done my scan and was ready to buy the price had moved up to 26.5 cents.
The fact that the price had already moved up quite a lot was of no concern since there usually is a lot further to go in my experience when this price action takes place. So it was not hard to make the decision to buy. I was buying it in my SMSF and risk management calculations indicated that about 100,000 was the right volume to buy. Seeing it was in my SMSF it was not a trade but an active investment so the weekly chart was the right one to use. On 09/07/07 I bought 100,000 at 26.5 cents per share for a total outlay of $26,533 including commission.
As you can see in August the price dropped to below my buying price. At the time I did not want to be viewed as trading in my SMSF so held on and next week the price once again took off. The right thing to have done technically would have been to sell at around 50 cents when the price moved way above the green ‘take profit’ line and buy back the position once the candle turned blue again just below 40 cents. These days I would do just that. The single purpose test for a SMSF means it is not permitted to use the super funds to finance your business. After thinking about it I have decided that when I buy shares it is my single purpose to provide funds for retirement and this single purpose requires me to protect profits as needed. I have plenty of funds outside my SMSF to trade with so do not need my SMSF to finance my trading business. So to protect the profits I should sell at times when the probability is that profits would be reduced if I did not sell.
This is the best way I can work out this complicated matter for myself so don’t take this as advice since I am not qualified to give such advice.
At least the price did take off again and after another very large excursion above the take profit line, followed by a large retracement it was definitely time to sell which I did on 14/01/08 for 80.5 cents per share. The proceeds of the sale were $80,467 giving a net profit of $53,934 being a nice boost for the SMSF. On an investment of $26,533 it was a return of 203% in 6 months, somewhat better than you might expect to get from a managed fund.
After that the share price was very volatile and fell as low as about 45 cents. Then in early April there was another entry signal as the price once again took off with another spike in volume as shown on the daily chart below.
This was a trade (not in my SMSF) with the 2ATR initial stop at 61 cents so the risk per share was 7 cents. The acceptable risk amount per trade for this account was just under $1500 allowing the purchase of 22,000 shares at 68 cents each for a total outlay of $14,993.
After rising steeply during the next couple of weeks the price settled to a trading range around 90 cents for late April and most of May but last Monday and Tuesday again took off with increased volume to trade well above the profit taking line which led me to decide to close the trade at an average price of $1.191. The net proceeds were $26,169 including commission of $33.
The net proceeds of the trade were therefore $26,169 - $14,993 = $11,176 or 74.5% in about 5 weeks. When you find these trades they are usually very profitable.
As is to be expected, not every one of these trades is profitable and this is illustrated by a trade in Focus Minerals Ltd (FML) where there also was a big jump in price and in volume which occurred on 30/04/08. Late on the day before there was an announcement that the company had poured its first gold from ore yielding a better than expected grade. They now had 3000 ounces of gold to sell and the market obviously liked the idea. By the time I was ready to buy the price had risen to 6.6 cents and the initial stop was at the previous trading range just under 6 cents. I was prepared to risk $900 on this trade so it was safe to buy 100,000 shares seeing the risk per share was likely to be no more than 0.8 to 0.9 cents. The trade cost was $6,633 and the price continued to rise to 7 cents and next day opened at 6.9 cents but then continued to fall that day and the next.
As you can see it did drop back to the previous trading range and after a few more days with no progress I sold at 5.8 cents getting back $5,767 for a loss of $866 or 13% in a week. It was a successful trade since I carried out the trade as planned. The loss was part of the plan, being only a small percentage of the trading account and accepted as the cost of doing business. Without taking these measured risks there would be no profits. In this case it was clear that the market sentiment had changed and there were no keen buyers to drive the price higher.
From the outset this trade was not as promising as the ones in COK. The stock was in a downtrend and the fact that the company had achieved a milestone was not sufficient to change the market sentiment. If I was inclined to spend a huge amount of time wading through volumes of company information I might discover a reason for the lack of interest in this stock but the chart tells me all I need to know to have a profitable overall trading outcome.
More articles from this edition of CompareShares:
Stock tips: Broker stock recommendations 2 June – 6 to BUY, 6 to SELL and 6 to HOLD
Stock Picks: Stock of the Week – Indophil Resources
Resident Trader: Coal Powered Rocket
Fees on super funds: Is your super fund ripping you off?
Commodities: Cheering silver’s fundamentals
Market reports: Top Ten CFD stocks for the week
Report: Australia a magnet for banker 'refugees'
Commodities: Aussie gold output drops to 19 year low
Companies: Centro gains extension from lenders
Economy: Inflation gauge rising 'at fastest rate'
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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