Analyzing Starpoint Energy Trust

10/28/05 11:31:18 AM

by Koos van der Merwe

In Canada, income trusts offer one of the highest sources of sustainable recurring cash yield in equity and fixed-income markets and are therefore the preferred structure for many retirees.

Security: SPN.UN-TO
Position: Buy

Income trusts in Canada are trusts structured to own debt and equity of an underlying entity that carries on a business. The income trust structure was developed to facilitate distributions to investors on a tax-efficient basis. Generally, an income trust can avoid paying ordinary income tax by paying all of its taxable income to its shareholders, thus avoiding a layer of taxation associated with corporate entities.

The income trust structure is usually adopted by a business that requires a limited amount of capital to maintain its property, plant, and equipment. They usually generate stable cash flows with earnings from the business distributed to investors each month or quarter.

The Canadian senior investors lapped them up in this low interest rate environment, but then the politicians stepped in, and the income trust market collapsed. What now?

As a chartist, I look to my charts for guidance, and one of the trusts that came to my attention is Starpoint Energy Trust, simply because it is a company that is engaged in the exploration for and the acquisition, development, and production of oil and natural gas reserves in Saskatchewan, Alberta, and British Columbia. It is also an income trust, so its performance is influenced by the movement of the oil price and by the political mess in the trust sector created by Ralph Goodale, Canada's unpopular finance minister.

When you look at Figure 1, you will see that I have incorporated my currently preferred indicators into MetaStock's Expert Advisor. I like this because I can see selected buy and sell points and draw a successful interpretation.

FIGURE 1: INCORPORATING PREFERRED INDICATORS. Here, MetaStock Expert Advisor is used to highlight a chart.

Graphic provided by: MetaStock.

The buy signals are:

Yellow: This indicator is the stochastic RSI formula
Blue: The Fisher transform, developed by John Ehlers
Green dot: Joe Granville's on-balance volume indicator
Dark green vertical line: The speed oscillator offered in the article Improve Your Trading System With Speed by Gomu Vetrivel in the November 2005 issue of Technical Analysis of STOCKS & COMMODITIES. I like the indicator as a confirmation of a buy signal. If I receive a buy signal on speed, I am more assured of an increase in the price over the next few days.
Yellow band, upper line: This is a JM internal moving average band. It is a 15-period simple moving average offset by 2% positive and 2% negative. A move above the upper channel is a buy signal; a move below the lower band is a sell signal.

The sell signals are:

PS sell (Yellow): This is the stochastic RSI sell signal
F red: The Fisher sell signal
White dot: The on-balance volume (OBV) indicator
Yellow band, lower line: Move below the lower band of the JM internal band
Red vertical line: The sell signal of the speed oscillator

(Please email me for any formulas you may require at jaxin@telus.net.)

ANALYZING THE CHART

The first thing I would see is the OBV buy signal given on October 24. I would consider buying the share on this signal the following day, and be justified in my decision with the PS By buy signal given with the speed line on October 25.

I will consider entering or exiting a position on an OBV signal if I have not received an earlier signal from any other indicator. The speed indicator acts as a confirmation to a decision or cause me tighten stops -- for example, should I be long and the speed indicator give a sell, I will tighten my sell-stop rather than close the position.

Is the strategy perfect? Not by any means. Which is why I am continually adding and testing any new indicator as they appear in STOCKS & COMMODITIES, and hence the speed oscillator. Should it prove itself, then I will add it permanently to my strategy.

For example, on August 4 the chart gave a PS sell, and two days later, it gave an OBV buy. I would have bought and been stopped out with a loss one day later. On August 11, I would have received another OBV buy with a speed oscillator confirmation and once more been stopped out before the OBV indicator gave a sell signal. On August 22, I received a PS By buy signal, confirmed the following day by a speed buy signal and the day after by an OBV buy, closing the position on September 12 on a Fisher sell signal. This would have given me a good profit, covering the previous losses. On September 15, the chart gave an OBV buy signal with a Fisher sell on September 20.

More conservative investors would use the JM internal band indicator. The buy and sell levels are shown on Figure 1. Used with the other indicators as sell levels, the strategy can be very successful.

At the moment I am long Starpoint Energy, and shall stay that way until I am either stopped out or receive a sell signal.

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.