CNY rally- play it smart!!!

Traders look forward to the beginning of each calender year in the hope that the Lunar New Year (or, Chinese New Year [in short, CNY]) will bring a rally in stock prices. However, the probability of a CNY rally is not very high. So far, the sign of a CNY rally taking place this year looks quite promising.

Normally, the rally would begin about 1 month before the CNY and would slowly tapper off towards the CNY. Based on this, some say that the next two weeks would be relatively 'safe' period for trading while the following two weeks could be relatively 'dangerous' period for trading. This simplistic approach is misleading & can be very dangerous. See Table 1 below.

I believe the better approach is to ask these questions:
1) Is there a strong reason for the rise in this stock? If yes, then the rally may continue even after the CNY. The rally in semiconductor stocks comes to mind.
2) If not, the rise of the stock is probably due to a 'push' to take advantage of the CNY period. Once a stock has been set for a 'push', the clock would start to tick. A stock that is being 'pushed' today would not be 'pushed' all the way to CNY. For these stocks, you should approach them as short-term trades applying strict money management rules (such as, protective stops etc). To be sure, it would not be a bad idea to take profit for any gain above 20%.


Table: 4 weeks to CNY

I must admit that I'm very wary of CNY rallies. I tend to equate them to sardine runs or salmon runs. Most traders think of themselves as the predators, but more often than not, they are the poor preys who would be eaten by others. I believe that for every trader who would make a gain, there are nine other traders out there who would be nursing a loss. The trick is not to get greedy & chase after every stock that moves. Of course, that's easier said than done. Good luck, out there!!!


Source: Farm4


Source: Tinypic.com

Please note that the 1300 level on the FBM-KLCI is a very strong horizontal resistance. There is a very high chance that it will not break on the first attempt (which took place early this morning).