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Two weeks ago we discussed the leading signals that pointed to Automotive Holdings Group (AHG previously AHE) being re-rated significantly higher on the basis of a profit upgrade from peer AP Eagers (APE), record new car sales for February and March and record low interest rates. Together with a low valuation, attractive 5% fully franked dividend yield and an exceptional chart formation it looked set to move to record territory.
Step in Joe Hockey and the small business boost of allowing up to $20,000 capital purchase being immediately tax deductible in full and the likelihood of a spike in car purchases looks almost certain. AHG subsequently rallied 7% this week into record territory and is beginning to fulfill our expectations.
However, this is only just the start of what we see as an exceptional appreciation where prices above $6.00 are likely. Now that we have the fundamentals in place, the key is remaining long by using technical trend following methods and then using them to exit shortly after the stock peaks.
The key to riding a longer-term trend is to avoid focusing on short-term timeframes – daily and intra-day charts. These are great for holding periods of several days and even weeks but to really capture a 30 to 50% or more gain in a share price, we need to focus on weekly and monthly timeframes.
Below is a weekly 10-year chart of AHG. The move to record highs means that everyone who ones the stock is now making money. A great circumstance because nobody is under pressure to sell. Overlaid on this chart is the 10, 21 and 30 exponential moving averages. I have highlighted on the chart three major trends in the share price in the past decade and it can be seen that every minor pullback in the trend held above the lowest moving average being the 30 week. Importantly low points in the trend occurred between the 21 and 30 moving averages. Finally when the trend ended and the 30 week moving average was breached it was the end of the trend. Take the profits and move on. So now we will use these moving averages to determine our exit strategy and potentially where we can buy more.
Buy more on dips towards the 21 week moving average and exit the whole position if the share price below the 30 week moving average. Initially the stop loss will be wide which is what we need to allow time for the stock to gather momentum, but once that occurs an exponential moving average will begin to catch the share price and the stop loss will be much tighter.
One of the best ways to show the power of this very basic and simple system is to look at the recent performance of a strong trending stock. The telecoms have been the best performing sector in recent years with major breakouts of multi-year consolidations – just like AHG has – and then experienced multi-year rallies.
Below is TPG Telecom (TPM) on a 10-year weekly timeframe. When the share price broke through to record territory above $2.50 (just as AHG is now) the 21 and 30 moving averages acted as trailing support with each low point in the share price for the next two years virtually stopping precisely on our support. When it finally did breach the 30 week moving average the share price was $5.50 – more than a 100% higher.
While no one system is full proof and perfect – even complex algorithms – this is a very basic and simple system that investors can use to aid in one of the struggles all investors experience – how long to hold onto an investment. This way we stick with winners that are winning and sell them when they stop performing. AHG is still in the early stages of winning for us.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.