Bursa Dummy: Dare To Catch A Falling Knife?

Tuesday, 13 March 2012

Dare To Catch A Falling Knife?

Last week Amedia's share price fell 26% in 5 trading days. I'm not sure why. It seems like there is no particular bad news, YET.

Amedia's share price has been on a nice uptrend since Oct 2011. It has just released a strong earning recently and there is rumour that it is applying to transfer to main board. However, it has proposed a private placement of less than 10% of its share capital as well.

AMEDIA: At 100-day MA

Until today, Amedia's share price is still falling but seems to slow down a bit. Is it an opportunity to grab it now? Will it stage a rebound at 100-day moving average support? Or will it fill the gap below RM0.31?

There are a lot of strategies that one can take to invest or gamble in the stock market. Fundamentally, we can buy and hold long term. Technically we can buy according to various indicators from the price chart such as volume spike with price increase, MACD cross-over, price rebound/breakout at support/resistance level, low RSI etc. Some can even buy and sell without fundamental and technical analysis. They just rely on their "sixth sense", corporate news or exercise, and the law that everything that goes down must come up.

Personally, though I rarely buy shares which are dropping drastically, I do put an eye on them and place them on my watch list if I encounter one. The drop should be something like 10-20% or more in few days time. Of course, there must be a reason behind a sharp price drop, which can be serious or not so serious one. Is it because of company account fraud, poor financial report, loss of contract, court case, unfavourable news, change of management committee, share dumping by major shareholders, or just solely because of bad market sentiment?

If it is just a short bear market run, then we can take the opportunity to grab some fundamentally-sound stocks. If it is other reasons, then there is always risk if you want to try your luck on them. You can end up catching a falling knife if you are not lucky.

In the early August and mid-September last year (2011), almost all the stocks in Bursa Malaysia suffered massive decline in few days time. However, if you were brave enough to pick them up when the falling momentum was interrupted, surely you could be smiling all the way as most of them staged a V-shape recovery.

Here are some examples of falling stocks and their outcome:

(A) Fall sharply but recover quickly, most fall are with the broad market