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Trading Diary

Trade Diary – 5 December 2019

We’ve exited two stocks this week including Western Areas and Dicker Data. We’ll hold the cash released from these transactions in cash for the time being. We have a full watchlist of stocks on our radar, however, have resolved to wait for more opportune entry points at this time.  

We’re now holding a total of 15 stocks in the model portfolio with a 16.7% allocation to cash.

Sells

Western Areas Limited (WSA)

We exited our position in Western Areas with a loss of 16%. We based our thesis for this holding on continued strength in the Nickel price. This continued strength has not come to fruition, and as a result, the trade has come unstuck. 

We entered the stock following a big gap-up in the stock price, which was on substantially above-average volume. The move is most visible on the weekly chart (not included here). 

Following this initial aggressive move to the upside, we expected a minor reaction to create a new basing point from which the major trend could continue. 

The stock established a basing point shortly after our entry on the 3rd of October at $3.01 and quickly tested it ten days later. What appeared to be a new breakout to the upside followed this test. However, the breakout did not have sufficient volume and quickly petered out, falling back into the base before rapidly failing to the downside. 

This base failure was our cue to exit. The Nickel price has fallen significantly from its highs. And what appeared might be the beginning of a major bull move has fizzled out at this point. As a result, we have stepped aside. 

Dicker Data (DDR)

We missed the initial breakout of DDR from the long shallow base that began in November 2017. Following this price breakout, the stock moved up quickly, gaining more than 80% in just four months. Along the way, there was only one brief basing point – a shallow reaction of only 8.5% over four days. 

In May the stock settled into a more traditional Wyckoffian base, which lasted until the beginning of July. We entered our position as the stock broke out from this base on above-average volume. The stock continued to move higher, lulling us into a false sense of security that the significant uptrend was continuing.

Again, this was not to be. At the end of July, the stock suddenly broke down, collapsing 29% over three days with significant volume and no news. This breakdown was not a good sign. However, since the stock managed to hold above the previous basing point and recovered quickly, we were inclined to keep our position at this point. 

The stock subsequently recovered to make new highs. However, it quickly fell back from these new highs and has been making lower highs and lower lows since then. This price action makes us believe that the major uptrend might be over or at least pausing at this time. 

Nothing has changed with the fundamentals of the company. The market might now have fully discounted the opportunity (perhaps even over-reacting to the upside as the market is want to do) and now needs to pause until there is new information that could cause some further valuation uncertainty. We believe that this uncertainty is what causes stock prices to trend, and therefore we tend to seek it out. 

In any event, we’ve now exited DDR at a very slight profit and will move it back to the watchlist.  

By Danny Sandler

Founder of Ocean Asset Management.