Monday, January 30, 2012

Accumulation or Distribution?

January 30, 2012

Over the past few weeks, a few stocks have reversed from their long downtrend & rose sharply. These include Maybulk & Unisem (see Chart 1 & 2). However, it must be noted that V-spike reversals- as seen in the cases- are not the norm. Reversals are usually preceded by common reversal patterns, such as Double Bottom, Triple Bottom, Inverted Head-&-Shoulders, Rounding Bottom, etc. For a stock or a market to undergo a V-spike reversal, all the players must change their opinion on the stock or market completely and that’s very rare. Reversals are normally preceded by a battle between the bears & the bulls- the outcome of that battle is never a sure-thing- and it is usually traced out in the patterns, as mentioned earlier. I will give you two interesting examples.

Chart 1: Maybulk's daily chart as at January 26, 2012 (Source: Quickcharts)

Chart 2: Unisem's daily chart as at January 26, 2012 (Source: Quickcharts)

The first stock is Puncak, which has declined from a high of RM3.00 in September 2010 to a recent low of RM0.96. Over the past 5-6 months, Puncak has formed a bottoming phase, where the bears or sellers are exiting while buyers or bulls are slowly accumulating. One of the big sellers is EPF, who has been disposing Puncak due to uncertainty surrounding the stock as it edges closer to a default on its debt covenants. This is due to the refusal of Selangor State Government to raise the water tariff rates. To the laymen who are not burdened with rules governing fund management, I do not see why you should sell Puncak at such low prices. In fact, Puncak’s water assets should be taken over soon, whether by the Selangor State Government or by the Federal government, via PENGURUSAN ASET AIR BERHAD (PAAB) or Water Asset Management Company (WAMCO). Many research houses have valued Puncak at more than RM3.00.

Chart 3: Puncak's daily chart as at January 26, 2012 (Source: Quickcharts)

From Chart 3, we can see that Puncak’s bottoming phase would be completed once the stock recovers above the RM1.33-1.35 level. I do not expect a quick recovery until the stock has broken above its intermediate downtrend line at RM1.55.

The second stock to look at is GENM or Genting Malaysia Bhd. At first glance, GENM seems to have formed a topping phase in the shape of a rounding top. Here, the buyers or bulls are buying while the sellers or bears are slowly distributing. However, not every congested trading at the top is distribution nor every congested trading at the bottom is accumulation. Each case warrants further investigation. GENM is an interesting stock because it has been tarnished by its past Related Parties Transactions (‘RPT’). The most infamous RPT case undertaken by GENM was the RM250mil acquisition of a stake in Walker Digital Gaming from its chairman Tan Sri Lim Kok in November 2008. Since then, GENM has never gotten the respect enjoyed by its parent, Genting Berhad or its sister company, Genting Singapore.

At one stage, GENM was sitting on a cash pile of more than RM6 billion. That cash pile has now dropped substantially as the cash reserve was used to acquire Genting UK as well as to finance two ventures in the US- Genting New York which is undertaking the racino project and Genting Miami which will undertake a proposed mega property project that may include a casino. If all of these new projects work out well, GENM would be a very different stock than what it is today. It would morph from a company owning one casino, Resort World in Genting Highland to a 4-casino company. Are the investors excited? I think they are slowly warming to this stock.

Chart 4: GENM's daily chart as at January 26, 2012 (Source: Quickcharts)

From Chart 4, you can see that GENM would pull back quickly every time it tested the resistance from the line connecting the peaks over the past 16 months- except for the past 3 months. Why have the buyers been so consistently strong despite the persistent selling? To me, this is not a sign of topping phase where one would expect the selling or distribution to overwhelm the buying. I believe the buyers are fairly strong and there is a good chance that the steady accumulation would wear down the selling & GENM would then go higher. The turning point is when GENM succeeds in breaking above RM4.00.

These are two stocks that you should keep watch out for. To all the Chinese readers, Cong Xi Fa Cai.

(This is my latest article in Merdeka Review. For the Chinese version, go here.)

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