Momentum investing involves taking advantage of, and making profits from, upward trends in a stock. The strategy makes a calculated bet that the stock market’s recent winners will remain winners.
William J. O’Neil, the founder of Investor’s Business Daily, was one of the most famous momentum traders, famous for his CAN SLIM method.
CAN SLIM is an acronym, with each letter representing O’Neill’s approach to identifying stocks with strong momentum:
C: Current Earnings – Look for companies with strong current and annual earnings growth. O’Neil suggests focusing on stocks with at least 25% earnings growth in the most recent quarter.
A: Annual Earnings Growth – Find companies with a track record of strong annual earnings growth. Ideally, this growth rate should be at least 25% in recent years.
N: New Product, Service, Management, or Highs – Look for companies that have recently introduced new products or services, or those with new management teams. Also, focus on stocks hitting new highs in price such as a 52-week high, indicating strong momentum.
S: Supply and Demand – Analyse the supply and demand, as well as the market dynamics of the business.
L: Leader or Laggard – Focus on leading stocks in leading industries. They are typically the stocks that outperform their peers and the overall market.
I: Institutional Sponsorship – Look for stocks with increasing institutional ownership, such as mutual funds, pension funds, and hedge funds. These funds can provide significant support for a stock’s price.
M: Market Direction – Invest in stocks that are in sync with the current market trend or momentum. O’Neil emphasised the importance of investing during a bull market, and avoiding stocks during a bear market.
To apply the CAN SLIM strategy, there are several market indicators that can be used to signal momentum of any given stock, and here we look at the three main ones:
52-week high
Simple Moving Average
Relative Strength Index
SIGNAL 1 : 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 EVE Eve Health $0.00 0.00% 0.00% 0.00% 0.00% HZN Horizon Oil $0.19 0.00% 8.82% 2.78% 5.71% JYC Joyce Corp $3.82 0.00% 7.00% 28.19% 28.62% OBM Ora Banda Mining $0.32 0.00% 16.36% 229.90% 137.04% GPR Geopacific Resources $0.03 0.00% 70.59% 70.59% 31.82% GDG Generation Development $2.15 0.00% 10.26% 36.94% 73.39% TOU TLOU Energy $0.04 0.00% 7.32% 62.96% 10.00% KPG Kelly Partners $7.30 0.00% 16.80% 80.25% 68.59% MIL Millennium Services $1.14 0.44% 0.88% 85.37% 235.29% VHT Volpara Health $1.14 0.44% 1.34% 64.49% 49.34%
Ora said recently that all claims in connection with the court dispute between Ora Banda, Riverina Resources and Greenstone Resources have been resolved to the mutual satisfaction of all parties, by way of a $3.4 million cash payment and a $3.0 million share payment (with escrow provisions).
The historical 2007 Joint Venture Agreement between the three parties, including the nickel rights of Riverina Resources and Greenstone Resources, has been terminated and Ora Banda now holds all nickel rights.
The termination of the 2007 Agreement also does away with the need for consent from Riverina Resources and Greenstone Resources relating to Ora Banda’s farm-in deal with Wesfarmers Chemicals, Energy & Fertilisers Division (WesCEF) subsidiary Davyston Exploration.
Geopacific Resources (ASX:GPR)
Detailed exploration assessment has identified known mineralisation and priority drill targets, with strong potential to increase the existing 1.56Moz Woodlark resource.
These new target areas are all close to the current resources and the known mineralisation in each remains open and largely untested.
They include the potential for new resources at the Great Northern and Wayai Creek prospects using existing data prior to resuming drilling.
SIGNAL 2: Simple Moving Average
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 AEI Aeris Environmental $0.07 >5% Above SMA >5% Above SMA >5% Above SMA >5% Above SMA ASE Astute Metals NL $0.03 >5% Above SMA >5% Above SMA 1 to 5% Above SMA < -5% Below SMA CYM Cyprium Metals $0.03 >5% Above SMA >5% Above SMA >5% Above SMA < -5% Below SMA FFG Fatfish Group $0.02 >5% Above SMA 0 to -1% Below SMA < -5% Below SMA >5% Above SMA ATP Atlas Pearls $0.17 >5% Above SMA 1 to 5% Above SMA -1 to -5% Below SMA >5% Above SMA AUZ Australian Mines $0.01 >5% Above SMA 0 to -1% Below SMA -1 to -5% Below SMA < -5% Below SMA MRD Mount Ridley Mines $0.00 >5% Above SMA >5% Above SMA >5% Above SMA 0 to 1% Above SMA BNL Blue Star Helium $0.01 >5% Above SMA >5% Above SMA < -5% Below SMA < -5% Below SMA GSR Greenstone Resources $0.01 >5% Above SMA >5% Above SMA >5% Above SMA < -5% Below SMA BAS Bass Oil $0.08 >5% Above SMA >5% Above SMA >5% Above SMA -1 to -5% Below SMA
Bass has been rising since announcing its full year results in late March.
The company reported record revenue of US$6.56 million for the full year, up 14.6% on the pcp.
Net profit was US$0.27m, up 575% on pcp, driven by increased oil sales. Net oil entitlement volumes were up 33.9% year on year, to 77,000 barrels of oil.
Bass says growth plans to enter the Australian east coast gas market are now underway.
Astute recently reported positive results from an updated Scoping Study undertaken following the November 2023 Mineral Resource Estimate update for the Governor Broome Heavy Mineral Sands Project, located in the southwest of WA.
Key study highlights include economically robust 10-year dredge mining project producing zircon, chloride and sulfate-grade Ilmenite, rutile, garnet and a rare earth mineral concentrate through third-party toll treatment of the heavy mineral concentrate.
The scoping study has outlined a project boasting strong returns and a positive valuation.
SIGNAL 3: Relative Strength Index
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 strongly bought; and an RSI below 30 indicates that it’s strongly sold.
An RSI above 80 meanwhile is extremely bought, and an RSI below 20 is extremely oversold.
10 ASX small caps with RSI over 70:
(data from Commsec)
Code Name 2 Day RSI 9 Day RSI 14 Day RSI CYM Cyprium Metals — Overbought — BAS Bass Oil — Overbought — BKY Berkeley Energia — Overbought — AGD Austral Gold Overbought Overbought — HLX Helix Resources — Overbought — MIR Mirrabooka Investments — Overbought — OBM Ora Banda Mining Overbought Overbought Overbought OIL Optiscan Imaging — Overbought — OMH OM Holdings — Overbought — ATH Alterity Therapeutics — Overbought —
Last week, Berkeley said it will refer its investment dispute with Spain to international arbitration under the International Centre for Settlement of Investment Disputes (ICSID).
In November 2022, Berkeley’s subsidiary BEL submitted a written notification of an investment dispute to the Prime Minister of Spain and the Ministry for the Ecological Transition and the Demographic Challenge, informing them of the nature of the dispute and the Energy Charter Treaty (ECT) breaches, and that it proposed to seek prompt negotiations for an amicable solution.
Up till now, the Spanish government has not engaged in any discussions related to the dispute and Berkeley believes it has no other option but to take action and enforce its rights at the Salamanca project through international arbitration.
BEL has engaged specialist teams at Herbert Smith Freehills Spain LLP and LCS Abogados to jointly prepare and submit the ‘Request for Arbitration’ to the ICSID, and represent it in these proceedings.
Optiscan said it was beefing up its presence in the US as it works toward securing US regulatory approvals for its confocal endomicroscopic imaging technologies.
The company has started to ramp up its presence in the US after announcing the establishment of a US Regional Office in Rochester Minnesota and the appointment of two US-based executives.
Optiscan has taken up premises at the Minnesota BioBusiness Center as it looks to grow its US operations and cement its presence in the Minnesota medtech landscape.
At Stockhead we tell it like it is. While Optiscan is a Stockhead advertiser, it did not sponsor this article.
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