With the market continuing to test the underside of its declining 200 DMA, there are several stocks coming back to life that have been dead money or trading in ranges for several months. One of these stocks is OpenText Corp. (TSX:OTC), which has been stuck in a range for almost 6 months, after a massive decline 1 year ago that almost halved the stock from $80.00 to under $50.00.
The stock has made 3 different break-outs to new highs in the past 4 months and trend followers are 0-2 on the stock (0 Winners, and 2 Losers) in a short period of only 3 months due to the whipsawing this stock has done. The first high and long entry at $69 was a new 52 week high and a strong breakout but followed up with a 12-15% loss depending on where your stop was in only 10 trading days after the 55 day high entry. The 2nd high and long entry was at $69.50 and was almost met with heavily selling pressure very shortly and after just over a month most were stopped out again after buying the absolute highs for the year for roughly a 10% loss once again.
Yesterday was the third time OTC broke out and it has surpassed the previous 3 highs but has a more coiled 20 and 50 day moving averages this time around, giving a similar stop of around 10% at $64.04 from $69.87 entry.
The difference in this setup and why I really like the stock here is due to the fact that I believe OTC has fallen off the radar of any trend followers due to the past performance of the stock on a trend following basis so recently. Not only are trend followers 0-2 on the stock for 2016 if taking every long signal the stock gives, their losses are also fresh in their memory and it’s difficult to forgive a stock that’s burned you twice in the past 3 months.
When investors/trend followers follow the rules and buy stocks on strength only to be severely punished for doing so, it leaves a bad taste in their mouth and they no longer trust
the stock nor want to be “made a fool of” a second time. The fact that OTC has done this twice and trend followers not only buy the absolute highs, but then sell the absolute lows makes it difficult to pay attention to the stock anymore as it brings back bad memories. Once most are fed up with the stock and it finally breaks out a final time, there is no one standing in line to buy it, as trend followers have “learned their lesson” that it doesn’t pay to buy this stock on strength so it breaks out and has less of an audience. Finally once the investors
who didn’t buy this breakout realize this one is for real, they want back in it but are now forced to chase if they want shares as they didn’t buy the initial breakout due to stubbornness from past entries.
You can see below BCB – Cott Corporation had a very similar chart and setup before exploding higher on my recent entry at $16.06. Three sets of failed 52 week highs met with immediate selling pressure and closes below the 200 DMA. After buying a stock’s high and selling a stock’s absolute lows if you are a trend follower, you no longer want to touch the stock as it’s got a bad track record and leaves a sour taste in your mouth tricking you into not only buying highs before it reversed, but also selling the lows before it moved straight back to the highs. While you may say and think “Well not only trend followers have been buying the stock” – that is absolutely true. But I would argue that anyone buying Open Text – OTC here, is most likely a trend follower as a very small percentage of investors who buy on value are buying a stock at it’s 18 month highs, as value investors pride themselves on buying cheap P/E multiples and “buying the dips”. So if most dip buyers are not buying the new highs made this week on OTC, and most value buyers are not buying the all time highs this week, and most trend followers are sick of the stock as they’ve been punished the two previous times attempting to buy it, then there are few styles of traders left that are eager to purchase the stocks at these levels. Those that buy on strength don’t believe in this move as the past two were failed break-outs that cost them money, those that buy on weakness don’t buy highs, which leaves many traders on the sidelines while OTC.TO makes a powerful move out of its $61-$70 range it’s traded in the past 4 months.
I am long OTC.TO from $69.87 and my stop on the position is below $64.05 on a closing basis. To see my other entries and the rest of my portfolio I encourage you to follow me at Twitter.com/TaylorDart01
Current YTD Performance 7.95% vs 2.9% for the TSX, not including dividends.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.