Tuesday, 26 January 2016

The lure of the Quick Buck

This post explains how I selected "Texmo Pipes", a stock that gave me 136% returns in about 44 days.

Purchase details: 23/11/2015, price 10.88
Sale details: 7/01/2016, price 25.75


Warning: Don't try this at home..

THE ENTRY

1. I read about some bad news hitting the company that suddenly caused a drop in its share price.

2. Checked company financials. Company had a low P/E ratio. It had a low P/B ratio and a good interest cover ratio. Low D/E as well as low long term D/E.

3. Checked the industry and current public sentiment on the industry.

4. Checked if the brand name had any presence and it did.

5. Checked "Equity Dilution" status and it was fine.

6. Checked promoter holding percentage and it was good.

7. Checked company website, Texmo looked like a good, serious company.

8. The situation was ripe for a detailed look at the Technical Analysis....


The Technical Analysis:

a) The price drop after the bad news was not accompanied by strong trading volumes, except on the first day. All price action that is not accompanied by strong volumes in trading, can be ignored, very safely, in most cases. It is not trend forming, in most cases.

b) The force index did not drop much on the bad news, and started lifting steadily and quickly.

c) The green GMMA barely dropped after the bad news. The red GMMA dropped substantially. Green GMMA indicates activity of medium term traders. Red GMMA indicates activity of short term traders.

IT WAS TIME TO MOVE IN.


THE EXIT

The green vertical bars underneath the sell point  reflect buyer enthusiasm. Buyer enthusiasm peaked on day two of the price spike and started diminishing. As indicated by the shortening green vertical bars.

So it was evident that upward price movement was losing steam, since it was accompanied by falling buyer enthusiasm.

Further, the gap between the red GMMA and green GMMA had become large. The red GMMA was much higher than the green GMMA, which meant that short term traders had poured in a lot of money into the stock. This is called "hot money".


TOO MUCH HOT MONEY HAD ENTERED TEXMO...IT WAS TIME TO EXIT.

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