A study in momentum: Or what goes up, will probably stay that way!

We touched  briefly on the concept of momentum or price action in yesterday’s article reading the smoke signals –  http://www.spreadbetmagazine.com/blog/reading-the-smoke-signals-how-the-views-of-leading-strategis.html 

In it we flagged the importance of momentum / price action when making trading or investment decisions. I thought it would be instructive to look at a real world example of this in action  over both the short and longer terms (intraday and one month) 

With that in mind I have chosen to look at the price action today and the prior month and to consider the signals generated by a study of both price action and  volume in these time frames that should have alerted us to a rewarding investment / trading opportunity 

Grainger PLC (GRI LN) the UK’s largest specialist residential landlord according to their website. Grainger Plc formerly known as Grainger Trust is a unremarkable FTSE 250 stock with a market cap round £740 million. The stock trades around 181,000 shares on average based on a 10 day calculation. Interestingly for a security that appears to been overlooked by the majority of investors they have comfortably outperformed both the top 100 and mid 250 indices since May of this year and have enjoyed a particularly buoyant spell since the start of July. This recent period of outperformance coincided with a break above the stock’s 20 and 50 day Exponential Moving Averages or EMA lines which were then to be found at and around 146.1p this was our first clue that something was afoot. Confirmation of that came on the following day when we saw a bullish candle posted in the Grainger daily chart, with the share opening above the prior close of 147p albeit by a modest margin of 0.3p. But we then saw Grainger go on to post a high that day of 155.7p and to close very near to that high at 155p. The next day was one of consolidation but the fact that the  low on the 3rd of July was 150.1p was suggestive of round number support. 

July 4th saw one the largest single day rallies in the FTSE 100 in recent times and though Grainger’s performance on that day was somewhat more pedestrian, they did post and close at fresh highs of 157p. the following two trading days also saw the stock post higher highs, the stock moved above 160p on the 8th of July and once again closed on its high  this time at 164.8p . Grainger made it a hat trick repeating the feat on July 9th. The day’s high and close being 167.2p. Note then that over a period  of 8 days the stock had posted 6 new or higher highs and had moved up by more than 20p above the key EMA lines it broke through on July 1st. A gain of almost 15% not bad for relatively unknown second liner I think you will agree. 

Grainger would continue to run higher throughout July posting significant volume of 1.3 million shares on  the 17th , breaking through 170p the following day above which it remains. 

Now let’s look at a some short  term or intraday signals from Grainger and conveniently for us they were posted in yesterday’s trade (01/08/13). The table below shows the  principal alerts generated  by Grainger today up until 15.17  ranked by time and price .

For convenience  I have split the data into three distinct sections 

In the first section we see prints immediately after the open – the first three of which   constituted fresh 365 day highs which would be interpreted  as positive price action. We then posted a session low print – obviously a negative signal .But given the time of day  and the fact that it was a fraction of a penny below the then intraday high that could be set to one side, especially as the next three prints that feature in our alerts table area  show progression of new 365 days highs. We then see the most important, though perhaps not the most influential alert of the day, posted at 9.55.39 am. This is a volume based alert which indicates that Grainger has traded in excess of 50% of its 30 day average volumes in this case cumulative volume of 1.6 million shares, versus the 30 day average volume of 533,000 .Remember that that average had itself been inflated by  the volumes posted on July 17th .The next three alerts in our table which were posted in less than a second, were successive session lows but again they were superficial in nature in the scheme of things. 

At this stage things went quiet for almost four hours  (I had spotted the volume alert  after coming out of  a meeting and was trying to discover  its source but had a drawn a blank. With the start of the third Ashes test and  the spectacular weather over London I think my contacts had other things on their mind…) 

Funnily enough the stock and interest in it sprang back to life around the end of the lunch break at Old Trafford & we saw a further progression of higher 365 day highs starting at 13.50.51 pm  and four points into this progression came what I would see as the pivotal alert of the day. Posted at 14.01.16 pm, this was a new print a full, penny above the high water mark  at 8.24.11 am  (which had  preceded the volume alert). It was one way traffic from there and we saw a further progression of 7 consecutive new 365 day highs upto 178.7p at 15.17.55. In fact Grainger went on to print as high as 187.50p into the close  (a gain of some 7%) and turned over more than 4 million shares on the day. 

Take aways 

One stock , two time frames, but in each case the patterns in price action and the breaches of key price points be they EMA lines or period highs  alongside larger than average volumes provided clear  directional clues regarding Grainger’s future share price.