Some stocks tend to perform much better or worse than they should, hence there is a need to look beyond price moments and sudden increase in trade volumes. In other words, we might be buying or selling at the wrong time if we are reacting to the false signals sent by the market. Such scenarios include buying into a pump and dump situation when stock prices climb aggressively before plunging in a short period of time. In this post, we will be exploring methods to see if an aggressive rally or plunge is legitimate.

Performance relative to analysts’ expectations

This is kind of obvious especially when you just started investing because you will likely be bombarded with analyst calls every day pushing for people to buy, sell, or hold certain stocks on their radar. Usually, these analysts will come to a consensus in terms of the expectation of the company’s future performance. These expectations will become the basis for comparison when financial reports are released in subsequent quarters.

Using Sheng Siong as an example, we can see that its stock price has grown more than 50% since 23 March. Taking note of the above dates of the analysts’ calls and release of its Q1 financial report on 28 April, you will realize that the rally is extended because OV8 exceeded the expectations of analysts (even though analysts are already expecting awesome growth in net profits). In short, monitor analyst calls if you require additional support for your own analyst. However, never rely on analyst calls’ wholesale because sometimes they might be wrong as well.

Breaking support and resistance

Support and resistance levels are virtual walls that keep a stock in a state of consolidation, regardless of it being on an uptrend or downtrend. Take a look at the obvious support turned resistance situation for Genting Singapore and notice the continued downtrend after breaking its uptrend support line.

Essentially, when that major support broke, G13 went downhill before bouncing back on a fair value which is supported by bigger institutional players. The point to note is the validity of this downtrend due to headwinds brought forth by both the US-China Trade war/tensions and the COVID-19 Pandemic.

Consistency in price movements

Price movements are deceiving because markets can be artificially spiked to react in a way that does not make sense. For example, during the first few weeks of the Covid-19 outbreak, Zoom Technologies experienced an illogical rally as it was wrongly associated with the Zoom application which was in high demand due to higher demands in video conference platforms services.

Taking this at face value, it is obvious that if you bought on 11 April and sold on 16 April, you would have made a killing however, such rallies usually do not last hence it will likely become a price trap like many cryptocurrency rallies. As such, always remember that legitimate rallies are usually “slow and steady” and consistent in nature.

Closing Thoughts

I hope this post would be useful for the coming weeks when parts of the Singapore market reopens as we expect some erratic price movements on the horizon. Basically, if there is any sudden surge in volume or price, consider checking with the above learning points to ensure you are not above to see an “l” formation, meaning that all your gains in a single day will amount to nothing if you are caught in a state of euphoria. Conversely, if there is a sudden dip that does not make sense, do stay come and plan ahead to take advantage of that opportunity to accumulate.