First published on SharesInvestment website on Monday 26 April 2010. Articles contributed to ‘Trend Spotting’ will be published here 1-2 days later.
At the moment, BH Global is trading within a horizontal channel that goes back to September 2009. This was however not so evident a week ago. In fact, it is conceivable that contra-traders might have jumped into a bullish ‘breakout’ scenario on the 14 April 2010.
By now, anyone intending for a quick contra trade would be feeling tense. Two choices are likely: pay up in hope for a rally or sell at a loss.
Let’s recall.
- On 12 and 13 April, price of BH Global stuck to a downward trendline shown in my chart as a thin brown dotted line. This line acts as resistance. If the line is broken with high trading volume and strong rallying price, experienced traders would see it as a ‘breakout’.
- On 14 April (point 1 in chart), price erupted over the top. A classical breakout takes place. ‘Breakouts’ are known to attract speculators who jump in to ride upward momentum in a short-term trade. Many are likely to make use of contra-trading rules to speculate without paying up. The same group is required to pay up or square their position in anything from 3 – 7 days depending on trading arrangements they make with their broker. The entry of speculators contributes to the sharp volume visible.
- Unfortunately, a ceiling exists at 37 cents (point 2). This is the high of mid-September 2009. Such a ceiling or resistance creates a selling pressure from profit-taking. Price was unable to sustain itself above 37 cents on 14 and 15 April. The breakout bangs intoa ceiling.
- As a result of retracement, profit-taking and margin calls, weak contra-traders who are unable to pay up are being squeezed out. 23 April is exactly T+7 day from the breakout day.
Breakouts are dangerous and rely on momentum to be sustained. They are fraught with danger because there are false breaks and there are breaks that throw back to the previous resistance. This is the latter. Contra-traders caught in such a predicament can only hope that the previous breakout trendline (point 3) becomes a support so that price does not fall lower or a price rally before they are forced to sell.
BH Global in retracement; contra-traders in at high feel heat
