The general idea as far as successful investing is concerned is to buy low and sell high. However, it can very well be argued that for many private investors and indeed, traders of all varieties, the reality of being in the market can be rather more complex. Other rules include buy high / sell even higher, and buy low / average down.
Tesco (TSCO)
I was reminded of this perennial dilemma by the price action of Tesco (TSCO) in the wake of its third profits warning in three years, a slashed dividend and presumably plenty of burnt fingers on the part of the bulls. This is because one can assume that many decided to go long in December at 320p, in April at 280p and even this month in the 240p zone. Each time they were buying a “quality” company at the bottom of the range and were backed by a chunky dividend of around 5%. Indeed, the same value argument presumably applies now in the 220ps where people can once again “buy low”.
The problem is how do you know whether this kind of situation is a falling knife which should be avoided or whether it is a bargain to be snapped up?
Luckily, as a technical analyst such philosophical issues are beyond my remit. What can be said currently is that the unfilled gap to the downside on the Tesco daily chart, and the extended descending price channel from October do not look very appealing. While, one may be able to job in and out for 5p – 10p off a dead cat bounce, this is an example of a setup where the fundamental and technical dust looks like it will take quite some time to settle.
Bwin.party Digital Entertainment (BPTY)
Moving along to another stock which has been beaten up of late, and we have Bwin.party Digital Entertainment (BPTY). Apart from being a company in dire need of a catchy new name, Bwin on its own would be a start, we see how in recent months the stock delivered an extended top towards 130p earlier this year. Perhaps the big surprise in the near term as far as the price action has been concerned is the strength with which the stock blasted out of a June falling wedge formation, after appearing to be so sickly for so long.
The problem we have now is that there is very often a risk that the breakout from such a wedge formation is sold into and there is a retest of the breakout level – in this case 82p. But at least it can be said that while there is no end of day close back below the 50 day moving average currently at 87p, we could see Bwin head back to late June resistance towards 100p over the course of September.
London Mining (LOND)
Finally, I have saved the most difficult bottom fishing opportunity until last: London Mining (LOND).
Here it can be seen on the daily chart how the shares stages an impressive dead cat bounce revival in June / July, effectively doubling from below 30p to above 60p. The position now is that the stock has come all the way back to test the area of the June floor at 26.75p.
Some cautious traders may wish to see whether the stock will trade closer than the August 28.5p low, but it looks as though we may have a higher low officially in place. This would mean a possible retest of July resistance at 60p plus for September / October, with an end of day close back above the 20 day moving average currently at 34p a decent momentum buy trigger for those who are still understandably cautious on London Mining shares.
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