Finally a Winner – My First Share Market Success Story

Up until now, I’ve mainly spoken about epic share market failures. I think that it’s important that I share with you guys the reality playing the share market – it’s a brutal beast and it will chew up and spit out the majority of us at some stage, none more so than naive beginner punters with little to no experience.

However, although mistakes are inevitable, it’s how we learn from them that makes the difference in the long run and I’ve tried my utmost to learn from my painful (and expensive) lessons. I’m glad to say that after a couple of years in investing pre-school, losing far more than I was winning, I finally feel like I’ve started to turn the metaphorical investing corner. This leads me nicely into talking about my very first significant investment winner.

By now I’d had a couple of years investing in the stock market, mostly learning “what not to do“, however I had started to get a handle on the basic concepts of technical analysis (TA). TA is basically reading and predicting the movement of stock based purely on a chart which plots a stocks share price movement (more on this in future posts). TA is usually used by traders who trade short term, or by longer term investors to pick optimum entry and exit points for buying and selling stocks.

I’d started to notice a lot of stocks spent a decent period of time (i.e. a minimum three months and sometimes a year or longer) forming a base with a reasonably tight trading range at the end of a long term down trend. When stocks eventually broke out from that trading range, when accompanied by a big increase in volume, they tended to bounce hard with swift and large movements in their share price

If that doesn’t mean anything to you check out the annotated chart of Red River Resources (RVR) below which should give you some idea what I’m talking about:

Red River Resources Breakout Candlestick Chart

Candlestick chart showing the basing pattern I looked for followed by a breakout on volume, often signalling a good time to buy.

 

These kind of trades seem to occur time and time again and had a very good success ratio from what I was seeing. I had made a few small trades based on identifying this kind of pattern with moderate success, winning slightly more than I was losing but with no real big successes – I was mainly testing out my new system.

Then along came Alexium (AJX). I was using a stock screening function of my charting software which I could program to scan for the kind of setups mentioned above. At the beginning of November my scans brought AJX to my attention. At the very same time I was starting to see a lot of chatter and hype on the stock market forums I was frequenting (which can be both a good and bad thing – over hyped stocks often signal a stock has passed it’s peak). But the stock hadn’t really done anything price wise for a long time, so I watched it rise slowly for a few days, waiting to see if it broke out of its trading range.

Then everything went mental. The stock broke out hard, with huge volume on the 7th of November, giving me the buy signal I had been waiting for, so I purchased $2,000 of AJX at 24.3 cents ($2,000 being my typical parcel size for trades at that point in time).

AJX Pre

AJX Chart on the 7th of Novemeber, 2014 – the day I first made my decision to invest in Alexium. Strong breakout from the trading range with volume.

I didn’t really have a set target – I just knew AJX looked prime for a run and bought in to hold until either a) the trade failed and I sold for a loss or b) it took off and ride it out until it gave me a sell sign. I had decided that I would sell if it dropped below 18c as this would indicate it was back below the upper limit of its previous trading range. Luckily for me, that never happened.

The first week I held AJX, nothing really spectacular occurred – a few ups and downs but it stayed between a range of 23 cents and 30 cents. I actually ended up buying a second parcel at 25 cents after a big daily retrace from 30 cents as all my indicators we’re showing that AJX was oversold. However, after about a week of holding, things started to move…and finally in a direction that brought a smile to my face.

Over the space of the next month AJX took off, moving from a low of 23 cents on the 13th of November to a high of 56 cents on the 11th of December. I had managed a 143% return in less than a month – to say I was pumped is putting it lightly.

I was stoked that I had finally picked a big winner, but I was almost more pleased with the fact that I had finally picked a stock based on an actual analysis. I’d done the research, I had a plan and I had executed it, rather than simply jumping on a random “hot stock” just because it was going up and everyone was talking about it. The fact I’d made myself a decent chunk of change in the process was just an (albeit massive) bonus.

Whilst I entered AJX with the intention of holding for a short to medium term trade, I ended up becoming fascinated by the company as a whole – something I’ve since found often happens to me with my trades that take off. When I initially purchased AJX, I basically knew nothing about the company other than it was in the business of developing the next generation of fire retardant (FR) chemicals. But as my portfolio balance starting growing rapidly, so too did my interest in learning about the company.

I discovered that a huge part of the hype and subsequent rise in share price was due to the fact the company had got into bed with a guy called Eddy Sugar who owned an American corporate advisory firm – EAS Advisers. Eddy and EAS had been involved with two well known growth stories of recent times – that of Fortesque Metals Group (FMG) and Liquefied Natural Gas Ltd (LNG). Both had seen rapid and parabolic growth in their share price following EAS involvement. For example, FMG shares had risen from less than a cent to over $130 – one of the most dramatic transformations in the history of the Australian Stock Exchange.

LNG Share Price Chart

Chart of LNG showing when Eddy Sugar and EAS advisers got on board.

EAS were known for picking mining exploration nobodies and turning them into multi-billion dollar companies – the fact that they had branched out from their traditional business (mining related companies) and into something totally different like a chemicals company made a lot of people think there must be something really special going on at AJX.

Through my research I found out that all other FR treatments currently available are made from chemical solutions containing bromine – a highly toxic substance that is bad for both the environment (it bio-accumulates) and for human health.

AJX had developed the only non-toxic, eco-friendly solution that was cheaper and easier to apply than anything else on the market. The global FR market was estimated to be worth over $7 billion dollars in 2014 and is expected to grow to over $12 billion by 2020 – if AJX gained even a fraction of a percent of that market it would make me a lot of money. To sweeten things, it looks like a lot of countries are in the process of banning brominated substances, which could lead to AJX being the only viable option for FR treatments in these countries.

To top everything off, I learned AJX was currently in contact with the U.S. military and were front runners to get a large military contract to provide FR treatments for military uniforms. This was potentially worth up to $10 million dollars in initial contracts and possibly many, many more millions in secondary contracts later down the track.

Everything I was reading about the company sounded extremely promising and, helped by the ever rising share price, I became convinced I should probably hold at least some AJX shares for the long haul.

The first real moment I considered selling came during the middle of December. Before then, I’d only ever really experienced one or two down days in a row – I was used to seeing any weakness followed up with strong buying. This case was different and over the space of four days the share price dropped over 35%.

In hindsight, I probably should have had a stop loss in place – I’d learnt from previous experience not to hold in blind hope. I didn’t have one, and in this case things worked out in the long run. Looking back, at least this time my buy and hold approach was based on solid research rather than blindly hoping for the best.

After a brief period of consolidation the share price continued on it’s merry way and over the course of the next few months I bought more AJX shares on three separate occasions resulting in quite a significant holding by my standards. In hindsight, I didn’t really pick the optimum times to top up –  I ended up buying emotionally as the share price surged upward, thinking that the next breakout was about to happen.

It ended up working out though and at the time of writing (28th of April, 2015) all but one of my top ups are still well above water. The chart below shows a history of AJX’s share price; when I bought in and my average overall price of $0.46. At present I am sitting on roughly 50% profit overall, and almost 300% if just considering my initial purchase at 24.3 cents – not a bad six month return!

AJX candlestick chart showing trading gains.

Candle stick chart of AJX. I’ve annotated where I bought my parcels as well as my overall average price (black line). Click chart to expand.

I did end up selling about 25% of my holding at $0.73, largely to free up funds to take advantage of opportunities in other stocks as well as to lock in some profit – something I’ve learnt is always a wise move. I currently have a stop loss in place in the low 60 cent region which would sell a further 25% of my holding, should the share price get that low.

At present, I intend on holding the rest until news regarding the U.S. military contracts are announced (either way). If, as research strongly suggests, we are awarded the military contracts I see the start of the next leg up for Alexium. In the mean time, the company has hinted that a series of commercial contracts are very much in the pipeline and, if announced, would be a nice bonus strengthening the fundamental reasons for holding AJX.

Alexium has also indicated that they are going to list on the New York Stock Exchange (NYSE) sometime in the middle of this year – another catalyst that I believe could result in increased interest and thus share price growth for AJX. I think there are exciting times for the company ahead.

As of right now, technically speaking , AJX has spent the last few months consolidating. The fact the share price hasn’t been dumped following an almost 800% rise from its lows of last year suggests to me that this rise has been far more than a “pump and dump” typical in most speculative stocks.

In saying that the AJX has a market capitalization hanging around the $AU200 million mark which isn’t exactly cheap for a relatively speculative stock with very little revenue at present. It is showing some signs of short term technical weakness and will likely continue to trade in a range between the the low 60 cent and 80 cent range until significant contract news (military or commercial contracts) is released.

AJX chart showing trading range.

Candlestick chart of AJX showing it’s current trading range between approximately $0.62 and $0.80. Click chart to expand.

I wont be topping up again until it shows a clear break out of that range with increasing volume, something which will only likely happen because of a big contract announcement. Until then I will be watching things closely, stop losses in place.

So there’s a brief summary of my first real successful investment. It was nice to finally learn through a positive experience and I’m happy to say that my gains from AJX alone have more than offset all of my previous losses.

In my coming posts I’ll outline in detail more about the specific lessons I’ve learnt from both my successes and failures – lessons that should help you become a more successful investor in the stock market. I’ll also keep you all updated with how things play out in the future with my investment in AJX – I’m sure there will be plenty more twists and turns in the journey ahead!

Happy investing.