Here are the comments written by Perspectives on WSP this past weekend - perspectives@shaw.wave.ca (available for free by email request)
Commentary
The Vancouver and Alberta Stock Exchanges are in the grip of the bear. The market pessimism is astounding, and will likely remain that way until at least the fall. This situation has many feeling quite frustrated; no longer are there so many opportunities to make money in the speculative stock markets.
While the opportunities are certainly fewer, there are ways to make profits under the shadow of the bear. This week, we look at the recent trading of the week's most active speculative stock, Winspear Resources, and the comments we have been making in our Daily Edition of Perspectives.
Our aim is to show you our thought process on WSP, and perhaps illuminate some things to keep in mind when watching the hot stock of the day. By focusing on the most active speculative issues, you can make money. But, the game is played quickly, and takes some clear thinking and savvy trading skills. Dreamers will die, and those without that guts to come off the sidelines will only tell stories of what could have been. So here is our Winspear journey.
June 15th, Perspectives Daily Edition:
"(WSP) announced today that they discoverd 238.9 carats of diamonds from their Camsell property, including some very large gem quality stones. Deserves to be higher, but in this pessimistic market, it may first stall in the $0.80 to $0.90 range."
The news had taken the stock higher on June 15th, and it traded on heavy volume. The market activity is what caught our eye, but the content of the news is what made us want to watch the stock. Our comment here was motivated by the trend of the stock. WSP had been in a downward trend for some time and it was clear that despite the news, pessimism ruled. This bit of news would be the catalyst to turn around the momentum, but it would take time and likely more news. Since the news of the 15th indicated that there was more testing to come, we knew that there would be the potential for a significant change in the fundamentals of the company. Thus, WSP was worth watching, but we expected it to get cheaper first.
The following day, the stock hit a high of $0.77, and then the weakness started to set in. When a stock is in a downtrend, there are a lot of investors who are frustrated and simply want to get out. With the higher price and improved liquidity, they took the opportunity. Ultimately, this drove the stock to a low of $0.53, which is more or less where the stock was before the news of the 15th. There is a reason for this.
Before the news, the market figured the company was worth about $0.55. With the news, the company was worth more, but the market takes time to find that value. So the stock sort of goes up and down with diminishing volatility until the market finds a consensus of what the company is now worth, while it waits for the next bit of news.
As traders, we want to watch for the first up day as it is indicative of the "profit taking phase" being complete after the original breakout. This is the bounce, and it often is the best time to get into a stock that has recently made a strong move to the upside. On June 18th, WSP closed up $0.01, on the 19th, it was up another $0.03. These were the best entry points because ...
June 22nd, Perspectives Daily Edition:
" ...hot stock today was Winspear, which traded 4.3 million shares on a shortened trading session (the VSE was late in opening). We suggested this stock deserved to be higher on its news on June 15th in Perspectives Daily, but suggested it would first stall in the 0.80 to $0.90 range. It stalled at $0.77 and then headed lower. However, today more news came out which sent the stock rocketing upward. WSP looks like it want to go higher from here, but we think it is risky buying it now given the move it made today and the fact that it is coming up to technical resistance at $1.35. The real opportunity will likely come on the short side, as the euphoric stocks have a tendency to go up beyond fair value and then pull back. There is still a lot of pessimism in this market which tends to drag good stories down (consider St. Jude for example). Do not short this stock until there are signs of a breakdown as it can still be more explosive. However, it is worth watching and trading as the liquidity and volatility are great."
Why did we say what we said, when the news was so positive? Markets have some memory, although academics will tell you that they don't. Academics don't make money in the market, so we were not surprised that the following day, WSP went to $1.37 before profit takers set in. The last time that WSP had traded sideways prior to the downtrend, it was trading under the $1.35 value. At that time, the market felt the company was worth no more than $1.35. The market remembered that and sold stock when it got to that level, turning it lower. Again, profit takers in a pessimistic market doing their work. We considered that the stock would come back off of the $1.35 level the morning of the 23rd, and watched for signs that weakness was coming. When it started, the short tickets have to go in for a quick trade. The stock closed at $1.09.
June 23rd, Perspectives Daily Edition:
" we thought Winspear would have some trouble getting through the $1.35 mark and it did, hitting a high of $1.37 before coming back to close at $1.07. Great sounding story, but the market is quick to take profits in this negative environment. Could still go lower from here, although longer term anything can happen."
The stock hit a low of $0.97 in the morning before starting to turn up again. Even $ amounts serve as an emotional barrier, so it is not surprising that the stock showed resilience around the $1 mark. Then, strength began to return. As one looked around the web for opinions on what WSP's news meant, it became clear that analysts liked the long term value of WSP. We heard reports of a $2 target for WSP, from reputed mining analysts. That confirmed the move back into WSP, which closed very strong on the day and up. Remember what to look for after a strong breakout day? The first up day after the profit taking...
June 24th, Perspectives Daily Edition:
" very short profit taking phase after the initial breakout, the WSP looks strong and may want to go higher from here. Risky, but rewards may be substantial. Significant diamond discovery at Snap Lake. Friday is almost always an up day on the speculative markets, look for WSP to lead the market tomorrow and likely do well."
Did well it did, WSP closed up the next day $0.52 to $1.65. We typically see these moves occur in three stages, each with a run up and a profit taking phase. So, that left one more ...
June 25th Perspectives Daily Edition:
" ... picked up $0.52 to close at $1.65. WSP should carry through with this strength tomorrow, but it is risky entering here. If you own it, the stock looks good but don't be afraid to take some profits. We expect the upside will limit at about $2."
Friday, the stock had its third profit taking phase, which leaves likely one more run up before the stock begins to trade sideways to find fair value. Take a look at a stock chart to see the various levels of resistance that we talk about (for great end of day charts, go to aurex.com , for intra-day charts, try bigcharts.com ). Our expectation is that we will see $2 before the stock sells off, with it ultimately trading sideways around $1.75 or so. Monday morning will likely open strong as the weekend newspapers will report on the hot stock of the week, and the last man in, who typically makes investment decisions on Sunday morning over coffee and a copy of the Globe and Mail, will buy stock from the savvy investors who bought early and have traded it a few times along the way.
We'll see what happens, and of course, hindsight is 20/20. However, the WSP has been a great example of how good stories get priced into the market. Hopefully, this longer look at a high flying stock will be of some use when playing the next one.
There is always another bus ...
Enough Said. |
