When To Fill Your Boots And When To Run From Situations Like Cupid

I have say that while I am certainly sure that being a shareholder of online dating websites group Cupid (CUP) may not have been a financially rewarding experience – yet anyway, everything else here has been extremely entertaining… Just the idea of Flirt.com and BeNaughty.com provides plenty of amusement to someone well into their second decade of marriage (past the 7 year itch or is it hitch?!).

But there are serious aspects here. The company was accused of ‘fakery’ in using false profiles to allegedly entice new clients (happily since cleared today by KPMG). This led the bears to engage in something of a feeding frenzy as far as not only shorting the stock was concerned, but also deeming the company to be worthless. Indeed, the attack here was reminiscent of the equity swaps furore regarding Quindell Portfolio (QPP) – there the bear argument was negated technically on the  break back for the stock above 10p.

But, how can you tell whether in the wake of such attacks and controversy, if you have an undervalued gem or a disaster on your hands? From my perspective determining a hit or miss in such instances is one of the most difficult things to do, especially when people who are normally good at spotting the chinks in the fundamental armour of a company make the bear call. This is an area of the marketplace (shorting) which, for many, is under resourced, especially as it amounts to more than just buying Tesco (TSCO) shares on a dip – such dips can last years if you are unlucky to arrive at the wrong time in the life history of a company.

In fact, probably the best way of providing at least one simple answer as to whether a material shakedown is the precursor of something sinister or a buying opportunity, and that does not involve forensic accounting, is to look at the price action of the company in question. For instance, I became bullish on Cupid on June 5^th, and can imagine that at that time I was one of the few people in the country to have such a stance. My cue was the end of day close back above the 62.5p April low. a break back above former support can very often be a flag that the market has become too bearish on a stock or a market. This may sound flimsy in comparison with the fundamental story but at the end of the day, a trader makes money on getting the price action right – even if they are Warren Buffett, all that matters is being on the right side of the move.

Looking at the daily chart of Cupid, currently it can be seen that not only have the shares held up above 62.5p for the best part of a month, but they have held a line of support at 65p and broken back above the 50 day moving average at 69p. While this may not be a bombproof setup and sub 63p would rewrite the script, it can be said while the 3 month price channel is held we could see further progress towards 90p – 100p, bear raiders permitting..!