The momentum trader looks for a good entry point, and would buy the stock if it has increased in value quickly. Picture Getty
Hot Money Monday: Beware of ‘mean reversion’ as Compumedics, Fatfish surge on momentum
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Momentum trading involves chasing the market by identifying the trend in price action of a specific stock, and predicting whether the trend is likely to continue.
The momentum trader looks for a good entry point, and would buy the stock if it has increased in value quickly.
Similarly, momentum traders could buy into stocks that have been oversold, in other words where the share price has declined rapidly within a short period of time.
But one concept that all cautious momentum traders are familiar with is “mean reversion”.
In finance, mean reversion is a theory which suggests that, after an extreme price move, asset prices tend to return back to their normal or average levels.
In other words, if there has been a shock in a stock price (either up or down), mean reversion theory says that prices will revert to their long term average.
Because of that, there’s obviously a bit of risk involved in momentum trading.
To be a successful momentum trader, one needs to be able to identify the best stocks quickly and accurately.
The goal for momentum traders is basically to enter into trades at key points in the trend in order to maximise profits.
There are several indicators to quantify momentum, and here we look at three main signals used by the market:
- 52-week high
- Simple Moving Average
- Relative Strength Index
10 ASX small caps nearest or at 52-week highs
Traders often view the 52-week highs as entry signals.
This is due what’s called the “52-week high effect” – where if a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.
On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.
10 ASX small caps at 52-week high
(data from Commsec)
| Code | Name | Price | How far from 52-Week High? | 1 mth return | 6 mth return | 12 mth return |
|---|---|---|---|---|---|---|
| AGI | Ainsworth Game Tech | $1.40 | 0.00% | 7.69% | 39.30% | 35.27% |
| AEF | Australian Ethical Investment | $5.70 | 0.00% | 6.34% | 45.78% | 21.28% |
| MVF | Monash IVF Group | $1.40 | 0.36% | 4.49% | 15.77% | 32.86% |
| VHT | Volpara Health | $1.12 | 0.45% | 1.83% | 25.28% | 35.15% |
| LPI | Lithium Power | $0.56 | 0.89% | 1.83% | 88.14% | 9.90% |
| MIL | Millennium Services | $1.10 | 0.90% | 1.86% | 338.00% | -- |
| NDO | Nido Education | $1.00 | 1.00% | 0.51% | -- | -- |
| NAM | Namoi Cotton | $0.49 | 1.01% | 3.16% | 12.64% | 6.52% |
| QIP | QANTM IP | $1.08 | 1.38% | 13.76% | 23.56% | 14.36% |
| BLY | Boart Longyear | $2.86 | 1.38% | 63.43% | 78.75% | 46.67% |
Unaudited revenues for H1 FY24 are expected to be a record H1 result of approximately $26m, 35% higher than pcp.
Sales orders taken for H1 FY24 were also a record H1 result of $30.3m, which is 74% higher than pcp.
Compumedics says it expects to return to profitability in H1 FY24.
Vita has been surging since providing a profit guidance in mid December.
Sales for the full year FY23 are expected to come in between $73m-$74m, versus FY22 of $66.9m.
Pre-tax profit is expected to come in between $11.3m-11.8m, versus FY22 of $10.7m.
The company said its sales growth has continued in all major markets: Australia, Malaysia and exports into China.
10 ASX small caps with prices above SMA
Simple Moving Averages (or SMA) is another indicator that can be used to gauge momentum.
SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.
As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA, the trend is down.
10 ASX small caps at prices above SMA
(data from Commsec)
| Code | Name | Last Price Value | Price vs. Simple Moving Average | Price vs. 20 day SMA | Price vs. 50 day SMA | Price vs. 200 day SMA |
|---|---|---|---|---|---|---|
| ACR | Acrux | $0.06 | >5% Above SMA | >5% Above SMA | >5% Above SMA | >5% Above SMA |
| ADY | Admiralty Resources | $0.01 | >5% Above SMA | >5% Above SMA | >5% Above SMA | -1 to -5% Below SMA |
| AEI | Aeris Environmental | $0.04 | >5% Above SMA | >5% Above SMA | >5% Above SMA | >5% Above SMA |
| BP8 | BPH Global | $0.00 | >5% Above SMA | >5% Above SMA | >5% Above SMA | -- |
| CT1 | Constellation Tech | $0.00 | >5% Above SMA | 1 to 5% Above SMA | 1 to 5% Above SMA | < -5% Below SMA |
| ASE | Astute Metals NL | $0.04 | >5% Above SMA | 1 to 5% Above SMA | 1 to 5% Above SMA | < -5% Below SMA |
| FFG | Fatfish Group | $0.04 | >5% Above SMA | >5% Above SMA | >5% Above SMA | >5% Above SMA |
| PFG | Prime Financial Group | $0.25 | >5% Above SMA | 1 to 5% Above SMA | >5% Above SMA | 1 to 5% Above SMA |
| GSR | Greenstone Resources | $0.01 | >5% Above SMA | >5% Above SMA | >5% Above SMA | < -5% Below SMA |
| NTM | NT Minerals | $0.01 | >5% Above SMA | >5% Above SMA | >5% Above SMA | < -5% Below SMA |
Shares of this Southeast Asian-focused fintech company have tripled over the past month.
The company told the ASX that it had no idea why the share price has risen so much, other than the fact that it had just completed a successful capital raising that raised $3.25 million via a placement.
The placement was strongly oversubscribed with its completion announced on 3 January.
The commercial-stage regenerative medicine company has been rising since announcing preliminary unaudited financial highlights for Q4 and full-year 2023, as well as providing guidance for Q1 2024.
Commercial revenue for Q4 2023 is expected to be approximately $14.1 million, an increase of approximately 50% on the pcp.
Commercial revenue for the full-year 2023 is expected to be approximately $49.8 million, an increase of 46% on the pcp.
The company has guided the market to commercial revenue of between $14.8 to $15.6 million for Q1 2024.
Commercial revenue for the full-year 2024 is expected to be in the range of $78.5 to $84.5 million, up between 57%-69% on the pcp.
10 ASX small caps with low RSI (Oversold)
Here’s another momentum signal used by the market – the Relative Strength Index (RSI).
RSI is a measure of the strength of a stock’s momentum, either in the upward or the downward direction, and is used to indicate whether a stock is oversold or undersold.
Generally speaking, an RSI above 70 means a stock is overbought; and an RSI below 30 indicates that it’s oversold.
An RSI above 80 meanwhile is strongly overbought, and an RSI below 20 is strongly oversold.
10 ASX small caps at prices with RSI Oversold signal
(data from Commsec)
| Code | Name | 2 Day RSI | 9 Day RSI | 14 Day RSI |
|---|---|---|---|---|
| PRN | Perenti | -- | Oversold | -- |
| IOD | IODM | -- | Oversold | -- |
| KAI | Kairos Minerals | -- | Oversold | -- |
| REY | Rey Resources | Oversold | Oversold | Oversold |
| AUQ | Alara Resources | -- | Oversold | -- |
| PTM | Platinum Asset Management | -- | Oversold | -- |
| AMT | Allegra Medical Tech | -- | Oversold | -- |
| KRM | Kingsrose Mining | Oversold | Oversold | -- |
| TLG | Talga Group | -- | Oversold | Oversold |
| EIQ | Echo IQ | -- | Oversold | -- |
The mining services company has been sold off recently following a string of suspensions in the mining operations of a handful of ASX explorers.
Panoramic Resources (ASX: PAN) said last week that it was suspending operations at its Savannah Nickel Project in WA due to low nickel prices.
Core Lithium (ASX: CXO) announced two weeks ago that it intended to suspend mining at its flagship Finniss operation in the NT.
And Alumina (ASX: AWC), the Aussie vehicle for NYSE-listed Alcoa, said it will stop producing alumina at its loss-making Kwinana refinery by September. Alumina said the decision was in response to losses incurred at the refinery, together with its age, scale, operating costs and current bauxite grades.
Kairos has been falling despite announcing in mid December that it’s made a high-grade rare earths discovery at the Roe Hills project in the Eastern Goldfields region of WA, not far from Kalgoorlie.
The company reported thick zones of high-grade, clay-hosted rare earth elements (REE) with assays up to 2.31% TREO – over a large area at the project’s Black Cat prospect.
The results include a standout intersection of 28m at 3854ppm TREO from 32m which includes 4m at 2.31% TREO (23,182ppm) in drillhole RHRC253.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any perceived financial product advice contained in this article.
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