Stock to Watch: CSL [5214]

When China Stationery Limited (CSL) was first listed in January 2012, there was a worry that it’s IPO will not perform well since local interest on china-based companies are generally low. Almost all of the shares of red chips were on a downtrend during the proposed listing of CSL (most are still on a downtrend or remain stagnant at a low level today). Investors are not willing to take risk in these companies mainly due to the unreliability of their financial data, thereby causing the share price to be traded at an abnormally low P/E (price-to-earnings ratio).

China-based companies listed in M'sia (PE)
But the strong 3-days upward movement on the first week of its listing and a subsequent wave that brought the share to its high of RM1.90 causes the general public to reconstruct their perception on this company, as can be seen from the spike in trading activities when the share price retraced from its high. Perhaps that is the intention behind the manipulation of the share price. The prior strong uptrend may be the work of syndicates so as to allow them to dispose their holdings at a favorable price to the optimistic investors when the share price retrace. If CSL is genuinely good and is really different from other China-based companies, it’s share price will not be traded at a depressed level today. Let’s look at the chart of CSL.

CSL Long term
The chart clearly depicts a downtrend for the company. After breaking its major support of RM0.98, the share price continued to slide by 40+% in less than 4 months. If you are a long-term investor, you can forget about this company. Spend your time doing research elsewhere. If you a trader with years of experience, you may want to trade the swings but I must first warn you that its risky because of its dampening follow-through interest and liquidity. The breaking of its major support of RM0.98 means that trading this company is almost equivalent to catching a falling knife. So how should one analyse the movement of this chart if he is to trade this share? When is the right time to enter? Let us take a closer look at it’s short term movement.

CSL short-term
Since bulks of the trading activities occurred at above the RM0.98 level, a break below that level will not only send the red chip further down but also alter the trading range of this company.  Because of the lack of past data to justify future support levels as well as the speculative nature of this share, we cannot rely on rigid technical tools in identifying pivot points. Instead, we need to understand what is happening behind the scene before putting ourselves at risk. Since syndicates are involved in this counter, the best approach would be to understand what are they up to based on their past and current transactions, their holdings and their attempt in manipulating the bid/ask to create a perception that favors them.

After breaking the RM0.98 level, a flat base is built at around RM0.805. No huge buying occurs at this level and in around 1 month the level is breached, bringing the share to a lower level (RM0.705). At this new low, buying interest arose. As indicated by the highlighted area in the chart, there are a number of days where we can see white bars with greater-than-average volume. This means that the syndicates could either be taking new position in this share or are averaging down. Whichever the case is, its a good news for us since they had already put their money on the table. Because of the low traded volume after 29th of January, the day the last white bar of the trading range is formed, it is safe for us to conclude that they are still holding most of their shares at a price of more than RM0.705 today. With that, we can speculate that the syndicate will average down to protect his holdings. In fact, as shares of CSL dip in the past few days, one of the syndicates is accumulating more shares from the other party. The increase in traded volume, coupled with the fact that the most recent downtrend is the third down wave (Elliot Wave Theory) since it first breached its major support, provide us with further confidence that a reversal is around the corner.

So we are quite sure that it will rise, but at what price should we enter? Because of the lack of past data, we can only GUESS where would the reversal points be. As we are essentially catching a falling knife here, we have to give ourselves a WIDE margin of error. Normally, I would choose the second or third round number that we can see after a share broke its latest support level as the possible point of reversal because of the psychological effect of round numbers. So in this case, its RM0.50, which to me is quite plausible given that it is also a round number discount (around 50%) from its major support level of RM0.98.

Again, I would like to remind you that this is a speculative trade. Do not attempt to profit from this sort of swings if you are not an experience trader. Even if you are, I would suggest that you bet on other opportunities that give you better odds. This post is written merely to provide a speculative view on shares that cannot be traded effectively using conventional technical analysis.

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