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At the very beginning of the year there were a multitude of shares that looked like they were offering value. As with all bear runs, it is often the case that fear of “unhealthy” shares exaggerates and polarizes emotion and all shares suffer. The question then arises as to how to recognize the good from the bad, especially when looking for long opportunities. With the second opinion of technical analysis (and third opinion from consensus analysis) this can be answered with some clarity.
Some months ago I wrote about the opportunities that were present in SIMS Group (SGM on the ASX) and how these shares were offering value, relative to historical price/ earnings ratios. They became the perfect example of how to combine fundamental analysis with entry based around Elliott Wave trading rules. As you will see from the chart below the trade returned some 35%-40% during a period when the ASX 200 actually fell by around 5% (from mid January until triggering a trailing stop in late February). SGM went even higher by late May, although this Bull Run was beyond the ‘rule following’ trader, unless other systems of entry outside of ProfitSource were incorporated.
click chart for more detail
Jump forward in time to May and you have a classic Elliott Wave Four buy set up with a well established time frame from both the TAPP (Time and Price Projection) tool and also (not included in the diagram) the Range Projector tool. The only issue is that you no longer have “value” working for you. The shares are now, relatively speaking, expensive.
This problem can be overcome by considering what the growth philosophy entails: buy high (yes I did say buy high) but sell higher. The caveat to this comes in the assurance that forecasted earnings are likely to increase whilst the dividend payout ratio (the proportion of earnings paid out to investors as dividends) does not move up. Even more simple would be to check the ‘experts’ in ValueGain to get a quick interpretation of the type of company SGM actually is. It’s a bit of a cheat, but equally effective.
click chart for more detail
Back to ProfitSource’s EW4 trading rules, progressive stop strategies and risk management, the trade can be instigated. Eventually the TAPP was hit dead centre before the subsequent and current correction (not shown).
click chart for more detail
All of the above provides another example of how a combined or integrated approach to investing and trading offers a real benefit to novice and expert traders alike. The lessons learned here can (and should) be applied to the market as it stands. There is no question that value is there to be found if you consider P/E and other ratios. The next step is to consider timing and it is here that ProfitSource will guide you.
Stay Sharp,
John Jeffery
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