Email of the day on assessing the charts of Autonomies
“Many thanks for your recent comments on Experian. I am learning!
“You say our next share should be one that in our opinion has the best chart. OK look at Coronation Fund Managers, (CML SJ). I have been holding off buying this share all year, on the grounds that it was too extended compared to the 200-day MA. In that time it has doubled. The chart still looks beautiful, regular consolidations but no major pullback. But now even more overextended. What to do??? And how could I have guessed a year ago that I SHOULD have bought it?
“Curiously enough, the CEO has been talking down the share (where have you ever heard of that before?). In a recent interview, 'Mr Pillay said his investment team believes the share price is at historical highs. "Our investment team believes the share doesn’t offer any value at current levels, and only one of our retail funds currently holds an insignificant interest in Coronation," he said.'
“Mastercard (MA) is in much the same category, though the increase here has been less dramatic.”
You are welcome and congratulations for even spotting Coronation which Eoin has also mentioned. If we do not look at price charts, we often do not know that these companies even exist, let alone how they are performing.
You made a very important point: “The chart still looks beautiful, regular consolidations but no major pullback.” In fact, Coronation has a mostly unbroken sequence of higher steps, as we often call them at The Chart Seminar. This is also confirmed by the semi-log scale chart.
You have the aesthetic eye to spot a beautiful chart, meaning that it has a pleasing, rhythmic consistency. This tells you that demand has remained sufficiently dominant to produce a staircase step sequence, in which each consolidation occurs above the previous step.
Perhaps you only discovered Coronation in 2013, but the earlier history told you it was something special, at least in this bull market cycle. With momentum moves of this sort, you can buy on breakouts, with stops at mid-point danger lines (MDLs), as taught at The Chart Seminar, or under the previous reaction lows. This would have taken you out on occasion but downside moves were brief relative to the advances and the MA was never broken except for less than a week in June 2012. Therefore you could have justified repurchasing on renewed confirmation of the momentum move, signalled by upside breakouts from trading ranges. Remember, adjust your tactics slightly in line with the nature of the trend, while it remains consistent.
What about now? There is no loss of consistency on the semi-log scale. However, I feel that equal percentage changes after an exceptional advance desensitise our perceptions. The arithmetic scale shows a steepening advance above 3000 in 2012. Currently, a MDL stop or stop under the previous reaction low is too far away, as it would surrender too much of the profit. However, you could use a trailing stop which is slightly bigger than the deepest step this year.
Lastly, I commend you for paying attention to what the CEO, Mr Pillay, is saying. He should know. Worst case: moves of this sort can be caused by a single fund which is attracting new money with its performance, which is mostly based on the continued buying of a single, somewhat thinly traded share. Needless to say, such situations end badly.Back to top