You are here
Robin Hood investment strategies
'ROBIN Hood, Robin Hood riding through the glen … Feared by the bad, loved by the good."
It's the theme song from the BBC version of the everyman hero who robs the rich to give to the poor. Derisively dubbed "Robin Hood traders'' by the finance industry, they steal from the professionals and take profits for themselves. Their success, according to the financial industry, must be due to luck because, after all, financial industry participants who supposedly know what they are doing, have been unable to match the success of the Robin Hood traders in these Covid dominated markets.
We can learn from these Robin Hood approaches because they trade on the basis of what they see rather than what they are advised to believe about the market. They limit individual stock risk by either trading very strong trends or by reducing selection risk by trading an index or an Exchange Traded Fund.
Gold has exceeded the US$1,920 target we set last month so Robin Hood traders have coin in their pockets to allocate to new investments. As with their historical activities in Sherwood forest, they are looking for points of weakness. The Shanghai Index meets these conditions with a temporary point of weakness in a strong uptrend development.
As expected, the fast rally that took the index from 2,960 to 3,450 was unsustainable. It's the nature of the subsequent retreat that attracts attention because it suggests that the weakness may be temporary.
The Shanghai Index developed a double bottom-style consolidation near 3,180. This was around 45 index points above the value of the trend line which is expected to act as a support feature. Even if the current consolidation is unsuccessful and is followed by a further retreat, there is confidence that the trend line will provide support for another rebound.
This uptrend potential is confirmed with analysis using other technical tools such as the Guppy Multiple Moving Average indicator. The reliable RSI indicator shows uptrend confirmation signals instead of trend collapse divergence signals. It's all music to the ears of Robin Hood traders.
This rebound behaviour suggests that there is strong potential for the Shanghai Index to resume the rebound rally behaviour but at a more sedate pace. This helps to establish a more stable uptrend with initial targets near the previous high at 3,450 and longer-term targets near 3,650, calculated from analysis of the weekly chart. Turning to the monthly chart, some dream of a 5,000 target with a 57 per cent return.
The trend weakness strategy is also applied to the oil chart, but here the working assumption is that there will be an economic recovery from Covid-19 sooner rather than later. Entry is based on economic weakness rather than technical chart features.
The Robin Hood traders believe joining the potentially rising trend will deliver monster profits. Nymex oil has recovered from the stunning lows in April. The original rebound was rapid with prices quickly moving back into positive territory to rest above US$33.00. The move from US$33 to the current US$41 has been slower and more measured. This more recent uptrend is defined with an uptrend line and this is used as a reference point to confirm trend continuation.
A continued move above the trend line and a move above the resistance level near US$41 gives an upside target near US$51. This target is calculated by applying the historical behaviour of oil to the current chart. Historically oil tends to move between support and resistance bands that are around US$10 apart.
Applying this analysis also suggests that a fall below the uptrend line will have a downside target near US$31. The momentum in the up move has slowed following the initial April rebound. However, a breakout above the resistance level is often powerful so Robin Hood traders are preparing for this 25 per cent price move.
Entering the uptrend at a point of temporary weakness in anticipation of a rebound is a strategy that carries increased risk because the trend weakness may turn out to be the beginning of a new downtrend.
Robin Hood survived because he always had an escape strategy and in trading terms that's called a stop loss. These adventurous new traders will continue to enjoy profitable success if they can apply the escape clause with the same degree of consistency and discipline as the original Robin Hood.
- Daryl Guppy is a financial technical analysis specialist, an equity and derivatives trader, and an author. He has developed several leading technical indicators used by investors in many markets