Amcol International

11/15/04 02:41:28 PM

by Koos van der Merwe

Should you trade on technicals or the news?

Security: ACO
Position: Buy

With a glance, Figure 1 looks extremely busy. On it I have recorded various news items on their dates of announcement, as well as a JM trading band and cup-and-handle patterns. Which is the better trade?

The earliest news I recorded was for January 13, 2004, when the company announced a fourth-quarter earnings webcast. The share price, after a pretty hefty fall, increased from $19.70 to $22.49, before dropping to $15.75. It started rising from this level, a few days before a 40% increase in its quarterly dividend was announced.

On the technical side, the JM Internal band gave a sell signal on January 15, although most investors would have been out of the stock before then on an 8% rising stop-loss from the high of $25.28. It only gave a buy signal on March 1, two and a half months later.

Figure 1: Amcol International. News or technicals, which is better?

Graphic provided by: AdvancedGET.

To recap: The JM Internal band is a 15-day simple moving average, offset, in this case, by 3% and -3% . A buy signal is given when the price breaks above the upper band, and a sell signal is given when the price breaks below the lower band. To refine the JM band signals further, I incorporated AdvancedGET's XTL indicator. The XTL (eXpert Trend Locator) Parameter uses a statistical evaluation of the market that can tell the difference between random market swings (noise) and directed market swings (trends). The indicator colors the bars accordingly: Red means sell, black neutral and blue buy. When the JM Band gave a buy or sell signal, it had to be confirmed by the XTL indicator; otherwise, it was ignored.

On February 12, the news that the company increased its dividend by 40% was announced. The share price started moving up two days before the announcement, and consolidated with the announcement, moving up only marginally before falling away to retest the low of $15.75. No JM buy signal was given, but one was given on March 1, which was not successful, as the price soon fell away to give a sell signal that took the price to retest the low of $15.75 once again. The share price only then started rising from a double-bottom formation, and two days later an announcement that the company recorded $8.9 million in income was made. A JM buy signal was given on March 31.

After touching $20.70, the price fell to the lower JM band line, when an announcement was made that the company's first-quarter earnings had increased by 60%. This caused the price to rise to form a double top at $20.70, before the share price fell away, giving a JM sell signal on April 26.

On May 14, the company announced a stock repurchase program, plus a dividend. The price started rising immediately, and a JM buy signal was given 10 days later. The share price rose slightly, consolidated, and then continued to rise until August 2, giving a cup-and-handle buy signal in the process. However, the price soon fell away to reach a low on August 20 of $16.49, and this was in spite of an announcement that there would be a 29% increase in dividend payment.

The share price then moved sideways until another announcement was made on September 14 that there would be another dividend payment with a 23% increase. The share price rose, giving another JM buy on September 14, forming a second cup-and-handle formation. Once again, the price fell away to give a JM sell signal on October 13.

The price started rising with the announcement once again of a quarterly dividend and gave a JM buy four days later on November 9, forming a third cup-and-handle pattern in the process. Whether it will continue its trading pattern of falling away once the dividend is paid or continue rising is anyone's guess. The relative strength index (RSI) indicator shown has not been that much help, either, as it moved within the 30/70 standard band, without any definite signals, unless the three- and seven-period moving average crossover is given. Unfortunately, this was even more volatile.

One thing we did learn with this exercise is that every time an announcement was made, the share price strengthened. One could therefore have traded the share by buying on the announcement and selling on a stop-loss, or on a technical sell signal.

This exercise shows that it pays to read the news.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.