Brainy's Share Market Toolbox Brainy's
Share Market Toolbox
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Beware the
falling stocks

The share prices of listed companies tend to rise and fall
at the whim of the market participants who
push the share price up, and those who pull it down.

 But do we have to hold on for the ride, or are there alternatives?

You are here: Share Market ToolboxBeware the falling stocks
Related links: Technical Analysis - Getting StartedTechnical Analysis - What is it?; Chart patterns;
Technical analysis (chart) indicators; TA - The Proof
Practical applications and more about Technical Analysis; Published ATAA articles; Blue Chips; Dow Theory;
Moving Average; Weinstein's 30-week MATrends and trend-spotting; Support and Resistance;
Breakouts; Candlestick charts; Divergence; semi-log price charts; Exit strategies; Stop Loss;

Beware falling stocks and the impact of insider selling

The final trigger that prompted the posting of this web page was a news story in the Australian Financial Review newspaper (4th February 2017) entitled: "‘Banner year’ for insider selling as directors dodge corporate disasters”. (The news article referred to six stocks: BAL, ACX, BXB, HSO, SRX, VOC. See more details below*.)

Introduction

The share prices of listed companies tend to rise and fall at the whim of the market participants who push the share price up, and those who pull it down — the on-going tug of war between buyers and sellers which is a normal part of the auction process which is the share market.

Much of this is caused by the opinions of the market participants who have views about fair value for the shares. These opinions might be influenced by the opinions of analysts, brokers or commentators, or it might based on the investor’s own estimation of fair value based on a set of assumptions.

Clever protection of investing capital

No matter what the reason for the swings in share price, the astute investor and trader who is keen to protect capital, and take profits where necessary, will closely watch the share price performance. They might deploy a Stop Loss approach as their exit strategy“if the share price falls below this particular level, I will sell just in case it might fall further”. A tougher trader who is even keener to protect capital might watch a rising price trend, and exit a position on a sign of weakness in the trend.

In some cases when a share price is falling, or exhibiting odd behaviour on the chart (such as a rising price on falling volume), there might be a very good explanation. It can be a good idea to drill deeper to understand why it is happening (on a price chart).

Inside information?

In many cases where someone inside a company is selling their shares because they know "something", or a substantial shareholder is selling down their holding for a good reason, the average investor won't have the same information at hand, but they can still be alerted to the selling by studying the share price performance.
 
The simple start of a downtrend in share price can be a good hint that something is not right. This can be followed up by searching the company filings for "Appendix 3Y - Change of Director's Interest Notice" documents, or "Form 605 - Notice of ceasing to be a substantial shareholder" documents.
 
News in the form of profit warnings can also confirm the potential gloom, and help to explain the falling share price. Of course, being able to interpret the stories in the price charts certainly helps. This is the field of technical analysis.

How to protect the capital

For a detailed case study of some stocks, and some very clear clues that told us there could be trouble ahead, see the extra details below.

* - You can read a recent news article from the AFR “‘Banner year’ for insider selling as directors dodge corporate disasters” regarding several of our ASX200 listed companies. Or if you don't have access to the AFR articles, see a preview in Brainy's Aussie Business Barometer blog.
 

More information

For more details, see the short cut links above to other information on technical analysis.


Share Market Terminology

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And whatever you do,
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Beware the sharks in the ocean. class="ht14"

Bellamy's Australia (BAL) - 2016

Bellamy's Austalia (BAL)

The price chart at right is a daily candlestick chart of Bellamy’s Australia (BAL) from July 2016. It is well known that BAL fell more than 40 percent on 2 December 2016 with the release of a 4-page “Business Update”, then went into a trading halt for several weeks. Could anyone have predicted the huge share price plunge? Consider the following.
 
A good uptrend was in place through 2016, and many investors and traders were rubbing their hands with glee at the profits. However, in August 2016 the price formed a trough (on 30th August) at the same level as twice previously in recent weeks (above about $12.82). The subsequent 5-day rally in early September then completed the right hand shoulder of a Head and Shoulders chart pattern. The price then consolidated at around the $12.82 level (plus or minus about 25cents) for six days before a Big Black candle on 20 September saw the price fall to form a Lower Trough. It then rallied back up to about the $12.80 to $13.20 level where it consolidated for another seven days before falling to form another slightly Lower Trough in October. [For information about the relevance and importance of Troughs and Lower Troughs, see the details about price trends, and also the details about Support and Resistance.]

Then on 20-22 October it rallied again to about the $12.80 to $13.50 level and fell even further to form an even Lower Trough in late October. Note that on the way down this time there were five successive Big Black candles interspersed with just one small bodied white candle. The volume pane of this chart has a 5-period Simple Moving Average (SMA) curve applied The Volume SMA is clearly rising in the period from mid to late October. That is, while the share price was falling, the daily volumes were rising indicating an excess of sellers — an excess of the supply of the stock — with not enough buyers willing enough to step in (if there were enough willing buyers, the price would not have fallen as hard, or at all).

Then after a volatile few days of trading in a broad range ($10.60 to $11.75 — almost 10 percent) the shares drifted to an even Lower Trough on 21 November. A few days later the December news and price crash happened.

Even without checking for company announcements, this succession of lower troughs on the price chart would have alerted many astute investors and traders that all was not well.

BAL
Bellamy's Australia (BAL)
(Toolbox Members click for a larger image)

Aconex Limited

Aconex Llimited (ACX)

The share price of Aconex Limited fell about 45 percent on 30th January 2017. Could we have anticipated this fall? The price chart at right is the weekly price chart back to December 2014. Consider the following information.
 
Anyone who bought these shares early in 2015 might have been extremely pleased with the share price performance — by June 2016 the shares were up 320 percent in 75 weeks (that’s more than 200 percent per annum annualised). Perhaps there was a good company story that helped to push the share price higher.

Nonetheless, the Head and Shoulders chart pattern that formed on this weekly chart from March to September was one warning of a possible downside to the share price. During this period the weekly volumes had risen, indicating a greater interest in the shares. But then the volumes increased markedly as the share price topped and fell in late July. The first three down weeks after the peak had lower volumes, but then the price decline intensified and the volumes picked up. [The daily and weekly volume is very important - see tenet #6 of Dow Theory.]

One key warning for those familiar with the Head and Shoulders pattern was that when the share price dipped to the neckline in early September, it then rose for three weeks but on declining volume — this was not good news. This observation of declining volume when the right hand shoulder is forming is the classic signal of price weakness (you can read about this in the classic text book “Technical Analysis of Stock Trends”, by Edwards and Magee).

The final price consolidation over four weeks in October at about the level marked on this chart as the “neckline” (at about $5.50) ended with a Big Black candle falling through the support level. This was the next big warning for investors.  
 
ACX
Aconex Limited (ACX)
(Toolbox Members click for a larger image)
 
MORE STOCKS TO COME IN THE NEAR FUTURE
 
Please make sure to visit again for the update.
 

Back to top.

Conclusion?

In conclusion, it is very easy to be wise with 20-20 vision in hindsight. But really, if we keep an eye on our open positions, and utilise some basic technical analysis principles, it is possible to consider the possible outcomes on the price chart. After all, we are playing with the probabilities and managing the risk, utilising the stories in the price charts. And with a little research we can often understand more about the underlying reasons for some stock falls — the sellers with the inside knowledge.

One of the downfalls of investors holding onto stocks like these is the greediness of wanting more and more profit. And then some investors continue to hold on in the belief that it will come good one day. In the mean time, the reality is that they have lost some of their investing / trading capital.
 
More information that could be useful for you:

And whatever you do,
beware of the sharks in the ocean!

 Beware the sharks in the ocean.
 
This is one of the many tools in Brainy's Share Market Toolbox.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.


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Last revised: 10 February, 2017