Since there is no perfect formula in making money in stocks, investors has to do more than just picking stock. In short, a proper trading and exit plan is imperative, for exiting a trade is usually harder than entering one.
Partial Distribution:
When stock price breaks below a support, it is usually a signal to take profit or to cut loss, but to execute the profit taking or cutting loss, it needs courage, and failing to act accordingly would cost a fortune. Whenever an investor is in doubt, a partial distribution is always a good idea. (Reducing 1/3 or ? of the positions).
Examples of Partial Distribution: Downtrend
Chart 1: Airasia – 5099, chart from 21/12/2007 to 9/06/2008.
As indicated by A, price of Airasia rebounded after being supported at RM 1.45 level, and the Bollinger Bands also expanded clearly with price of Airasia above the Bollinger Middle Band, thus indicated a buy signal. However, due to the lack of volume, the rally failed to sustain, and later, price retreated, breaking below the Bollinger Middle Band dynamic support, forming a downtrend, thus a signal to cut loss.
As indicated by B, after breaking below the Bollinger Middle Band, price also broke below RM 1.45, and investors should take this as a cut loss point. However, it is not easy to cut loss for most investors, and therefore, it is a good idea to apply the idea of partial distribution by cutting 1/3 of the position.
As shown on the chart, after selling 1/3 of position, price moved sideways, until the re-expansion of the Bollinger Bands as indicated by C. However, as the Bollinger Bands expanded, price of Airasia was below the Bollinger Middle Band, thus a signal suggesting a formation of a downtrend. For investors who had cut loss 1/3 earlier, to selling the remaining of the position is no long difficult, for psychologically, they had already accepted an imperfect trade.
Example of Partial Distribution: Uptrend.
Chart 2: AMMB – 1015, chart from 22/06/2009 to 13/10/2009.
As indicated by A, AMMB was resisted by L1 line, at RM 4.38 level with a risk of a Double Top formation. Generally, when investors are feeling uncomfortable, it is a good idea to practice partial distribution by selling 1/3 of their position. This is to prevent the loss of paper profit when price retreat, and yet to preserve a portion of position to ride with the current uptrend for more potential upside movement.
As indicated by B, despite hitting a resistance, price of AMMB managed to rebound from the 14, 21, 31 EMA, precisely, and later breaking above the L1 resistance line, breaking new high. For investors who had reduced 1/3 position, the remaining 2/3 position will ensure that the uptrend is still profitable, and therefore, psychologically, there is not rush or great regret. In fact, investors can even top up their position at a break out point.
This week's Case Studies:
Pelikan
Chart 3: Pelikan – 5231, chart from 24/06/2009 to 15/10/2009.
As shown on chart 3, Pelikan's Bollinger Bands contracted to 2 weeks, and on the 14thof October, finally re-expanded. This suggests an end to the consolidation, while a beginning of a new movement. With the price of Pelikan above the Bollinger Middle Band as the Bollinger Bands re-expands, it suggests that the new movement is likely to be bullish biased. Therefore, provided that the Bollinger Bands should continue to expands, with price remains above the Bollinger Middle Band, there is a chance for price to rally, and even a chance to break above RM 1.75 level, and the Bollinger Middle Band shall serve as the dynamic support as well as the trailing stop reference.
When the Bollinger Bands re-expands and trigger a bullish signal, the best confirmation would be a significant increased of volume. In other words, investors should monitor the arrow B, and see if volume should increase significantly. If volume should increase along with the bullish Bollinger Bands signals, it would be a confirmation to the bullish signal.
However, if price should break below the Bollinger Middle Band, it would means a beginning of yet another consolidation or a technical correction. Then, investors should watch out for the support level at RM 1.49. If price should break below the RM 1.49 level, it would be a signal to cut loss.
Latest Financial Summary of 30/6/2009：
| PER* | 70.22 times | Dividend Yield | 1.27% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 2sen | 2.06% | 3.15% |
| 31/12/2007 | 11sen | 2.76% | 7.79% |
| 31/12/2006 | 15v | 4.08% | 11.73% |
| 31/12/2005 | 12sen | 5.88% | -16.87% |
| 31/12/2004 | 0sen | 0% | -2.41% |
Table 1: Pelikan Financial Summary
Scomi
Chart 4, Scomi – 7158, chart from 2/06/2009 to 15/10/2009.
As shown on chart 4, price of Scomi broke above the T1 downtrend line on the 14th of October, breaking away from its downtrend which lasted for 4 months. Price of Scomi tested the RM0.65 resistance level after the breakout above T1, and retreated as it was resisted by the RM 0.65 level. Generally, a break out above the T1 line does not necessary means it will form an uptrend immediately, but rather just a breakaway from a downtrend. To form a valid uptrend, price has to rebound from the 14, 21, 31 EMA while forming a higher-low, then only it has the characteristic of an uptrend formation. If investors should follow the formation of Higher-low as a buy signal, the 14, 21, 31 EMA would be serving as the trailing stop reference.
On the other hand, when price is forming a higher-low, the best confirmation would be a significant increased of volume, as indicated by B. If price should form a higher low with strong volume, there is a better chance for the uptrend to sustain until a break below the 14, 21, 31 EMA.
Support for Scomi is at RM0.56, and if price should failed to form a higher-low, and break below the RM 0.56 level, it would be a new low, thus a signal to cut loss.
Latest Financial Summary of 30/6/2009：
| PER* | 6.73 times | Dividend Yield | 0.83% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 0.50sen | 1.59% | 5.53% |
| 31/12/2007 | 1.25sen | 1.21% | 13.15% |
| 31/12/2006 | 1.25sen | 1.49% | 5.37% |
| 31/12/2005 | 1.20sen | 1.21% | 16.19% |
| 31/12/2004 | 0.50sen | 0.36% | 10.41% |
Table 2: Scomi Financial Summary.
Conclusion:
The main reason why investors failed to cut loss, is the worry of price rebound right after they had cut loss. Therefore, cutting loss partially would help. When price continue to fall after investors cut loss, to cut the remaining position is no longer difficult. However, when price rebound after partial cut loss, investors do not have to hurry in, because they still have positions in profit, and they can even top up their position.
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