In my first book on charting, aptly titled “101 Charts for Trading Success” published last year, there was a chapter discussing whether charting or technical analysis could be used to determine whether insider trading has taken place. Sadly for the FCA, this is debateable.
In fact, while this form of analysis is useful, I would guess that the main giveaway is when someone makes a lot of money on their spreadbet account on a stock they have never traded before.
However, the second best indication, and one from which money could be made off legally, is what I call the “final flush out.” This is how I refer to a “sharp bear trap” that very often occurs 4-6 weeks before a bid or bid approach is announced.
My cynical explanation in my book was that people with inside information, tend to buy ahead of time – which tends to be a couple of months ahead of the big announcement.
Clearly though, if you know that say, Kentz Corporation (KENZ) is going to be taken over ahead of time, you have little else to do apart from buy around the average price (400p) and plan your holiday to the Bahamas. But for those who are not so fortunate, there is another possible way of getting on board – on a technical basis.
This is because for some strange reason, the market seems to work in a way that those who are long of a bid situation like Kentz, and who are just there by “accident” will, quite frequently, actually not get lucky. What very often what happens before a company is taken over, is that there is a temporary sharp dip. This is sharp enough to shake out “weak bulls”, but rarely lasts long, as all the insiders know the stock is set to rise sharply. Surprise, surprise, we were treated to a “final flush out” dip for Kentz on June 13th – a couple of weeks outside my 4-6 weeks rule, but good enough.
Moving on to the opposite scenario, and with Quindell Portfolio (QPP) it can be seen how 4 weeks before the May collapse below 6p the shares had actually gapped to the upside. On this basis, even if you were of the opinion that Quindell was a “sell” you would have been hurt badly (something that SBM’s old friend ‘ol Caaawkly aka Evil – not Evel – Evil Knievil has certainly been in QPP with reports today that he is wearing serious losses on this to match his many other disasters this year and as flagged here on RPO!). The position now though would appear to be, that after an extended recovery, we have been treated to a failure at the red September resistance line of 14p. Perhaps EK may get lucky for once?
While this could very well be a “one day wonder” in the wake of the latest update from the legal services/technology group, there would now appear to be little incentive to go long unless or until the red 2012 resistance line is broken on an end of day close basis.
Indeed, in the wake of the “bull trap” through the 200-day moving average currently at 12.66p we run the risk of a minimum test of the May uptrend line at 11.5p. But only a weekly close below this is probably enough to seriously damage what has actually been a three-month “bear trap” of particular class.