All Ords Report 23/06/2015

What do shareholders think about the change at the helm of one of our top 20 companies?

Based on the movement in the share price on Wednesday, following the announcement, you may conclude that Woolworths (WOW) shareholders are feeling a bit uncertain, as the price opened at $26.67, traded to a high of $27.60 and then closed well below this at $26.80. It’s enough to make you giddy!

However, from my perspective, as a trader and technical analyst, this was nothing more than activity by institutions and short term profit takers who were out in the market betting big on a WOW recovery. As you know, news and human emotions drive the market. At times the market will receive new information well, while at other times, a company’s share price can take a pounding. In the case of WOW any news is going to be sensitive given the market’s disappointment with Masters, which may be a three to five year proposition to turn around.

However, a jump intraday in the WOW share price doesn’t mean that all speculators did well….I can almost guarantee that many amateurs who tried to speculate on the news were left holding the short end of the stick by the day’s end. If you believed that information like this would allow you to jump in and get out on the same day so as to make a quick buck think again. Your chances of getting in at a good price and out at a higher price was very slim, as on the day the share price shot up to $27.17 in just the first 10 minutes of trade.

Think about this for a minute. Say you were able to get in at $27.17, or thereabouts, and by some chance you were able to get out at or near the high, all you would have made is around 1.6 per cent. However, in reality, the share price barely spent any time at the high and therefore chances are you would have made much less or worse, ended the day in loss. Now, I wouldn’t get out of bed to make 1.6 per cent, and I know that most of you who have done my courses wouldn’t trade this way either.

Traders I meet who don’t have the proper knowledge and try to make their living trading this way end up losing. You see, these same people make all of the mistakes that 90% of traders who fail do, and one of the main ones is they ignore the bigger picture and try to guess a bottom. If a stock is falling, which WOW has been for some time, the chances that it will continue to fall are high, and the amateurs don’t have the knowledge to work out where to, and most don’t even know what their risk is when they take the trade. This is what I call high risk.

You are far better off letting the mugs try to pick the bottom, or to see a turn in price, and instead have a plan that requires you to confirm the low is in, let them test the water for you. Your plan ought to be like the most experienced traders in the market, which is to trade on confirmation that the turn is in. This means you need a few rules up your sleeve, that will help you to make good decisions.

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Waiting for confirmation of a turn may mean that you miss out on a bit of the rise after the bottom, however, you are likely to miss most of the false starts that can tax your bank account very quickly. When the stock eventually does rise, you will be ready to make your move. This I call taking the safe money in the middle – remember that trading well and increasing your chances of success is not about trying to guess tops or bottoms.

Think for a minute of a lion and how he hunts. What does he do while stalking his prey? He doesn’t just run after any target, at any time. He waits until that right moment when he knows instinctually that the catch is his. In a similar way, this is how the trades will feel when you gain the right knowledge and experience to trade well. It makes sense, right?

Just a final point on WOW. My bigger picture analysis has indicated for some time that the share price is on a trajectory heading south, with strong support between $26 and $27 – WOW is currently trading within this range, from which it may rise. However, a good trader who has sound analysis to back him/her up knows that $25 is likely to be the next support level below the above mentioned range, and is also a realistic level for the low. Therefore, watch for confirmation of a turn before considering putting your money at risk.

So what do we expect in the market?

Last week the Australian share market closed at 5591 points, which was a positive sign of support above the 5500 point level. You will notice that the weekly range over the past two weeks has been a lot lower than what the market observed over prior weeks, which may mean activity is settling down. However, bear in mind that following the emotional fall two weeks ago, the market may continue to bounce at around the level of the recent low, being 5463 points, before the low can be confirmed.

Longer term, the market has been following a trend; rising for many months and then falling each year for between five and eight weeks to resume the trend. You will notice this longer term trend from the low that occurred in 2011. So far the recent move down is typical of what we have observed previously, which means the market is behaving quite normally.

Investors will do well to remember that provided you have rules to manage your shares you will limit any downside risk, while providing room for your shares to move, so as to capture a subsequent rise when the trend resumes.

Looking overseas, there is still a lot of attention on Greece. In all likelihood, if Greece does not meet the demands of creditors, the due date for payment will be pushed out, and the market and media attention will find another focus.

Last week the US Federal Reserve Bank (FED) reconfirmed that an interest rate rise was probable this year, however any rate increases would be gradual. My view has been that a rate rise in the US would be unlikely until the second half, and September or October are months increasingly being talked about. I don’t expect markets to overreact when the first cut occurs given the amount of warning the FED have provided about the likelihood of a cut this year.

One topic repeatedly being discussed in the parliament is Australia’s free trade agreement with China, and the boost this is expected to bring for Australian jobs. The Federal government are proudly spruiking the improvements that have so far been flowing through for many of Australia’s exporters to Japan and Korea, from new trade agreements there. These are very interesting times and I will discuss this topic in more detail down the track.

Dale Gillham is Chief Analyst at Wealth Within