In early 2014, Temasek Holdings Pte Ltd announced that one of its units, Breedens Investments Ptd Ltd has made an offer to buy Olam International with cash offers of $2.23 per share.
This offer to buy Olam was at a 12 percent premium to Olam’s previous closing price of S$1.995 prior to the announcement.
On the surface, this development might look like a total surprise to many investors who has only been looking at the fundamentals of the company.
But if you know how to read stock charts, you would already have noticed many signs that suggested that something extraordinary was brewing within Olam.
Clearly, people who has insider information to Temasek’s impending acquisition, has already acted or prompted their close friends or relatives to act, way before the news was announced.
And below, I will discuss about 3 key trading lessons why a proper stock charting reading will help you identify potential insider trading and allow you to profit the most out of a seemingly unpredictable event like this.
What happened to the stock before offer to buy Olam was announced
Since June 2013, Olam’s price has been trending lower steadily. With its 3-year key downtrend channel still very much intact and unchallenged, I was generally bearish on this stock on a medium to long term basis.
Despite so, I noticed from the stock chart that Olam had halted its persistent fall by September 2013 and it went on to consolidate within a narrow trading range between S$1.40 and S$1.57 over a four months period.
This was a sign to me that Olam could be forming a key bottom and could possibly face a major change in its price trend should it conquer the $1.57 resistance.
Finally, the day came in the middle of February 2014 and my patience to just sit and do nothing paid off.
The market pushed Olam’s price beyond the S$1.57 key resistance on heavy trading volume.
That was the turning point which I reckoned could be a major psychological turning point for Olam, as what some people call the dawn before the daylight.
That was also when I issued a technical BUY call for Olam.
Following my technical buy report, Olam climbed sharply with minimal pull-back or consolidation. I believe the sharp run-up was due to its inherent pent-up bullish energy rather than due to my technical report being published.
Within three weeks, Olam’s price had run up more than 25% from the entry price of my trading report, before jumping another 12% when Temasek announced the offer to buy Olam the next day.
Frankly, I had issued the BUY technical trading report because its stock chart had clearly indicated that the tide could have changed and Olam could see better days ahead.
I had no insider information at all that Temasek’s unit was planning to buy a significant portion of Olam from the open market.
And never had I expected the price to run so hard and so fast in such a short period of time as well.
For clients who traded on my report and made a windfall, I congratulate you for the nice fortune landed.
But for those who did not take part in this price surge or worse still, for those who were actually shorting Olam during this period, I hope to share 3 important trading lessons here.
If you are able to heed these three key points and apply them to your trading, you can avoid missing an opportunity like this or avoid getting caught on the wrong side in the future.
1) Price usually reacts before key news about the company emerge
As I visually monitor the price movements of hundreds of stock charts on a daily basis, I have personally noticed that on many occasions that price reacts way before key impactful corporate announcements were made.
Especially on the aspect of acquisition news, the price of the company that is being acquired will usually start running strongly before the acquisition announcement and offer price is made public.
Although it is technically illegal to trade on insider information, it is otherwise difficult to explain why the price will see such sudden jump of positive price momentum just before the actual announcement.
A similar example to Temasek’s offer to buy Olam, was Maybank’s buy-over of Kim Eng back in 2010.
On the 6 January 2011, Maybank announced that they had offered to buy Kim Eng at a price of $3.10 per share.
Prior to the announcement made, the share price of Kim Eng had already started surging from a price of $1.90 to $2.70 (up 42%) within 3 weeks, before jumping another 15% right after the announcement was made.
Clearly, that was also an abnormal form of price movement that no fundamental reasons will be able to explain before the actual acquisition was made known.
However, the key learning point is that when you first notice a sudden pick up in the price momentum of a stock, there is no point for you to go around asking why the price moved in that manner, because you usually will not get any useful information.
What matters is “Have you acted on what you saw?”
As what I have always preached, price movement is almost always the first place where you will normally get the first clue of any key fundamental developments happening.
If you know how to read stock charts, you would have noticed the sudden price movements even before the news has been announced.
By the time the news or announcement is out, the game is usually over as the price would have moved significantly by then.
Unfortunately, most of those “man on the street” still subscribe to the view that everything that they need to know is in the fundamentals of the company.
If only you involve technical analysis as a key part of your trading decisions, you will notice price movements that are out of the norm and as such, has the opportunity to act on them before the run is over.
2) Buy on breakouts at major turning points of key trend change
When I issued the technical BUY call on Olam, it was right after the stock signaled a price breakout above the $1.57 key resistance to a new 6-month high.
From my many interactions with the retail investors and traders, they are reluctant to buy when price reaches a new period high as they deemed the stock too expensive.
They always like to buy on the pull-back, during a correction or worse still, during a a sell-off in order to get a “better price”.
However, they failed to understand that many a times, at key juncture where a stock reverses its major trend, the stock tends to break a key resistance and run away without any meaningful retracements.
This Olam example proved my point exactly because after the price breakout happened, the stock simply ran higher all the way to the announced acquisition price without seeing any meaningful retracements.
If you had tried to wait for a pull-back to buy, you would never have a chance to get into this trade and made money out of it.
So the key learning point here is: Do not be afraid to buy a stock during a price breakout at key turning point of its long term price trend, especially if the price has gone through a recent consolidation phase with relatively narrow trading range.
As long as you have a stop loss order placed slightly below that key resistance-turned-support level, your downside is very much protected and limited.
3) Let your profit run as long as the stock is behaving normally in your direction
The last trading lesson I wish to share is the mistake that most traders make by taking their profits too early.
One of the hardest trading Holy Grail to implement for most people is learning how to let your profits run.
Many traders have the habit of setting price targets which allow them to quickly take small profit once their trade is in the money.
However, what I advocate is that, as long as the stock keep climbing steadily without showing any signs of pulling back, one should have the discipline to keep holding on.
In the example of Olam’s price surge, many amateurs would have taken their profits when it touches $1.70, $1.80 or $1.90.
With the stock jumping to the acquisition price of $2.23 thereafter, many traders left tons of money on the table by trying to pick the top of the move.
What you could have done, was to implement a trailing price stop a certain distance away from the last done price.
This allows the stock to consolidate within reasonable range and prepare for the next potential strong surge.
Should the strong surge not materialize, the price will fall to the extent of touching the trailing stop.
The trade would be exited and you will still hold on to the bulk of your profits made.
So the key point to learn here is that if the stock is not showing any signs of reversing its trend in your timeframe, just continue to hold the stock while slowly moving your trailing stop higher!
Learn how to read stock charts to gain a trading edge
As time goes by, there will be many other stocks showing similar kind of price movements before an official announcement of an acquisition is made.
If you learn how to read stock charts and make it a point to apply the above three points in your trading, you will be in a position to take advantage of such situations in the future to maximize your returns within a short period of time.
Share this article with your friends so that they will benefits from these tips as well!
Latest posts by Philip Teo (see all)
- Why choose Technical Analysis over Fundamental Analysis - April 20, 2019
- What is the most ideal trading horizon for a part time retail trader - April 18, 2019
- How can I identify the ideal trading style based on my personality - April 16, 2019