Dec. 21, 2011- LC – Broken Momentum Stock? – Inconclusive.

Note to all readers: You just have to be careful about making such bold assertions/decisions about what is to follow.  Everything below is personal opinion/speculation.

When you are trading Lepanto Consolidated Mining (LC) , here are a few pointers to keep in mind:

1.) Gold  is priced based on what the last guy paid for it. There are no earnings or yield, so it is strictly a function of last price paid.  Gold is no longer the consensus long.  Don’t be complacent.

Dennis Gartman writes “Gold is not a metal.  Gold is a state of mind.”  I couldn’t agree more.

2.) Trading Lepanto Consolidated Mining has no fundamental measure.  There is no rational explanation — beyond pure speculation — why the stock is so expensive.  It depends on further speculation and sheer volatility.

3.) There is something reckless about recommending a stock fueled largely by speculation, while downplaying the risks.

4.) Prevent any single bet getting big enough to imperil the portfolio as a whole. (Remember Rogue traders, MF Global episode etc)

*****

In Traders’ Pizza (a popular forum amongst Philippine trading enthusiasts), I read a very good quote from Qatalyst.

Qatalyst pointed out last Dec 13, 2011 that LC is probably the most crowded trade in the market today, which I will agree wholeheartedly, as the trading volume of the LC covered 20-30% of overall total volume of the entire market during the first week of the month, and has turned awfully quiet these past few days averaging little more than Php 100Mil after breaking 1.65 (previous temporary support).

However, will the fact that volume drying up these days be a sign that this is the end, and the momentum stock has broken?  I’ll argue not, but I’m not blinking either and act like it doesn’t matter that a lot of trading stops/exits were hit for short term traders these past few days.

What’s the current story?

Pros 

1.) 1.58 is the 38.2% Fibonacci support, and 1.50 is the next 50% Fibonacci support.

2.) Relative to all moving averages, LC remains in a correction/consolidation mode.  This is healthy.  Notice that volume is drying up as it falls, which is a sign that its merely resting and will need time to filter the trading band to be tighter.

3.) There is no reason to hurry and buy dips in LC.  If a more serious correction to 1.50 (50% Fibo) will bring prices much lower, and offer better bargains or just consolidate back up to 1.60s after staying at 38.2% retracement today, both scenarios can be totally possible.

Cons

1.) There remains a lot of traders caught with supply levels of 1.70 to 1.80 areas that will first have to be taken out, before LC can move higher.

2.) Regardless of any speculative bets or hopeful thoughts, the pullback to 50% Fibonacci retracement indicates weakness.  That LC(A) is weaker compared to the (LC/B) chart for instance, punishes traders who are trading their technicals as there have been many stops hit and breakdown levels reached.

Alternative Analysis on Lepanto Consolidated Mining (LC) 

1.) Understand people’s incentives and you can predict their behavior.

2.) What drives people’s decision making?  Will they change their stance quickly?  What numbers will be a turning point?

Most of the time, stocks that hold the best  are bought as they break out from their recent consolidations. (Note PGOLD and AAA’s action as an example)

Further Useful reminders on Alternative Analysis:

1.) Prices change when perceptions of risk change, but also perceptions of risk change when price changes.

LC @ 1.50 or close to it, am I generally a buyer or a seller?

2.) The fear of missing out is the downfall of most traders.  Always wait for a follow-through day.

LC @ 1.58 – do I buy now or wait till skies are clearer?

3.) Self fulfilling prophecies- when enough eyes are looking at the same level and act, expectations could turn into reality.

When enough eyes believe that LC has a support at 1.50, that can turn into a reality.

4.) Obvious levels of potential buying/selling interest don’t work at all.

If enough people will buy at 1.50, that level will most likely not come.  Similarly, if enough people believe there is or is not a Santa Claus rally or the Euro will hit 1.25 or what have you, the other’s chances of happening increases.  Hence, there’s a lot of Wall Street sentiment indicators just trying to gauge what everyone else is thinking and when it becomes extreme to be on the contrarian side.

*****

I believe that for the stock LC, we specifically just think about the incentive of the major holder of the stock, which in this case is the person/group trading behind F_Yap Securities.

I’d like to apologize that the time here is 9:00-12:30 (should have been 9-1pm) so the data above will be insufficient.  Nevertheless, I can still dissect and explain this data very well.  I chose August 2 to Dec. 20, 2011 for three reasons.

Reasons:

1.) A lot of traders are comparing the run up this Nov. 17 – Dec 10’s run up as a “double top”, comparing it with the August 2- August 24 run up when LC scored a 50% gain in a month.  There are huge differences.

Take a look at the following historical broker transactions: (I think these numbers are also in 9-1230 times, sorry, I didn’t realize I haven’t fixed the default times to adjust with the extended PSE trading hours)

1.) Last August 2-August 24 , F_Yap accumulated 96.656 Mil shares at 1.2962, and 76.83 Mil shares at 1.4003 for LCB.

– Notice that he was patiently buying, and never averaged up. – Behavior: Patient and Buying on Consolidations

2.) August 25- November 15, F_Yap accumulated 603.95 Mil shares at 1.2618, and 115.80 Mil shares at 1.3178  for LCB.

– Notice- average price was very low again.  He never sold anything even when prices went as far as 1.80.  (Or at least, F_Yap brokerage wasn’t being used to sell any share).  – Behavior: Patient and Buying on Dips

3.) November 16 – December 20, F_Yap accumulated 705.75 Mil shares at 1.6063 of A and 107.505 Mil shares at 1.7886 for B.

– Notice – For just one month, he bought more shares of A than he ever bought in the past 4 months.  Note too that he bought at higher prices making his average at 1.61 and 1.79

Behavior: Aggressive and Averaged Up

Summary of Transactions:  Between August 2 to Dec 20, 2011- F_Yap has bought 1.41 Bil shares of A at an average of 1.4236 and 299.9 Mil shares of B at 1.5021

At current prices, he’s still way in the money.  And we haven’t even computed any shares lower than 1 that F_Yap has.

What to make of the information above?

1.) The biggest holder of shares has not left the stock.  The volume of the breaks have made a lot of speculators leave the stock temporarily, but any positive price action will propel the same buying effect that it once had when it rose to 1.80.  If a person has cut, possible supports can be 1.50 or near there.  If one hasn’t cut, one can either use the F_Yap average price to be one’s stop loss price, or whatever personal chart stop that you are using, as LC is a technical stock, and anyone touting fundamentals is just merely basing estimates on estimates.  It’s like taking a derivative of a derivative.

2.) There’s lesser number of shares controlled by “weak hands” (i.e. short term traders), rather than stronger hands (i.e. F_Yap, Macquarie etc) who would generally have a time frame longer than a few days.  Stocks can go lower, but I’m normally a skeptic when volume dries up breaking some perceived levels of support (Round numbers such as 1.60 etc).

3.) Decide on your own based on what I’ve presented.  Leave comments below.

Full Disclosure:  Since I deem that this post can be biased, the author has a position in the said stocks (Lepanto A and B)  I’ve cut some stocks bought on dips, but there’s still a position left.  

– Faceless Trader

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15 Responses to Dec. 21, 2011- LC – Broken Momentum Stock? – Inconclusive.

  1. jason says:

    Ft,
    What if fyap sold thru other brokers? He is showing support on one hand and unloading on the other?

    Like

    • of course that is also possible.

      Like

      • Hi FT. Hi Jason. I hope you guys don’t mind me butting in. Jason, your statement is the most used refutation when someone posts buyers/sellers of certain securities. Even if what you’re saying is true, we can never have any proof of it.

        My opinion as a trader, I think we should focus on things that are concrete. Ideas like the one you said feel like self-sabotaging.

        Imagine you just had a buy signal of a certain security but you thought “What if xxx sold through other brokers, showing support on one had and unloading on the other?” 😉

        Like

  2. lokiwoki says:

    same comment as jason. what’s your take, faceless trader?

    Like

    • In general, I look at both price and volume. Even if price falls, if it’s not confirmed with volumes, I may reduce position but have a mindset to get back in. I don’t really know. Of course, I’m just guessing, pero normally if price falls, volume has to come with it. It’s like seeing a stock breakout but no volume. Will you ever consider buying a stock breaking out without volume? LC’s been trading around Php 100-150 Mil recently so I would rather be on a neutral inconclusive mode.
      -FT

      Like

  3. spicysiomai says:

    very nice analysis! 2 thumbs up!

    took the bitter pill and sold all >1.60

    Like

  4. got stuck … early holiday mode for me 😦
    hahaha Merry Christmas FT!

    Hope to see you in 2012!

    Like

  5. jason says:

    chasing,
    that’s why i don’t use broker buy or sell in my trading. If i get a buy signal in my system i buy, if a sell signal, i sell.

    Like

  6. cutter says:

    My thoughts are with Jason. The stock market is rigged in the first place, so assume everyone else is a crook. Take their money, before they take yours.

    Like

  7. rloinm33 says:

    Hi FT, nice LC analysis. Hope you included the net sellers also so that we can compare both net buyers and net sellers. My view is 1.40 is my major support and willing to wait on that price.

    Like

  8. Ben says:

    bought LCB at 1.79 yesterday. I think the we have seen the low for LCB at 1.73. Still needs to break 1.90 to trend up.

    Like

  9. Pingback: Jan. 3, 2012- Welcome Back! Happy 2012! « Faceless Trader

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