E&O- an exciting technical play developing

The recent proposal by Sime Darby to acquire a 30%-stake in E&O from three major shareholders could trigger a MGO. This argument arises because Sime & the three vendors have structured the deal, with clear intention of avoiding a MGO whereby the three vendors would continue to hold a combined stake of 12% in E&O after the deal while disposing off a combined stake of 30% to Sime at a price signifiantly higher than the prevailing market price. One can construe from the structure of the deal as well as the pricing thereof, that Sime has gained management control of E&O. For more, go here. The proposed acquisition of the 30%-stake in E&O is priced at RM2.30 per share.

Whether SC would agree with this interpretation or not, we won't know. From the weekly chart, we can see that E&O has been tracing out a Cup with Handle formation. The Handle takes the form of an inverted triangle or a Loud Hailer formation. If E&O can break above the RM1.80 level, E&O could hit a target price of RM2.30 (which is arrived at by adding the depth of the Cup of RM0.70 to the brim at RM1.60). Hi, that number looks familiar!


Chart 1: E&O's weekly chart as at Sept 6, 2011 (Source: Tradesignum)

Ignoring the uncertainty surrounding the Sime deal, we can see that E&O could potentially hit a high of RM3.20 in an extremely bullish scenario. Alas, this scenario will never come to pass.


Chart 2: E&O's monthly chart as at Sept 6, 2011_plotted on log scale (Source: Tradesignum)

For the gung-ho traders out there, this high-risk trade may be very tempting & hard to resist. Good luck!