The Link Between Patterns, Caravan Parks and Stock Trading

If you’re the type of person who enjoys staying in a caravan park, I suggest you go book a trip while there are actually a few still around.

That’s because companies keep snapping them up and converting them into housing estates, mostly for the old.

It’s not hard to see why the owners are selling out. One of the last family freehold caravan parks in Sydney has been sold for $33 million, according to the Australian Financial Review yesterday.

The buyer was Ingenia Communities Group. They’ve bought another one at Hervey Bay in Queensland, too. But they’re hardly the only company operating in this space.

This is a trend to follow in the stock market…

One way to make housing cheap

Caravan parks are being converted into manufactured housing estates. This is where a company will retain ownership of the land, but build and sell houses on the separate lots.

The house buyer gets a home and shelter, for a lot less cost. That’s because the land component is stripped out of the purchase price. They’re also part of a housing estate, with the sense of community that can bring.

Companies that run these manufactured housing estates obviously charge for the houses they’re selling.

But they also receive ongoing weekly rental income. This is what that the homebuyer pays to occupy the site —– to rent the land the house they own sits on — and use the facilities of the estate.

It’s not hard to see the appeal for older Australians who can’t afford a regular house, or who want to unlock equity in their current home to fund their retirement.

This is big business in the United States, and a trend I have been following for several years here in Australia. I’m not alone.

The sovereign wealth fund of Singapore is rumoured to be interested in buying retirement village owner National Lifestyle Villages in Western Australia, according to the Australian Financial Review.

This is following on from the same sovereign wealth fund already spending US$2 billion to invest in a US company operating in the same game over there.

Deals like this should get your attention. And you should know, there’s more than one player in this space in Australia.

One of them is called Lifestyle Communities Limited [ASX: LIC]. We took a look at the compelling tailwinds underneath this sector back in October of 2014 for our issue of Cycles, Trends and Forecasts at the time. LIC was $1.92 then. It closed at $3.35 yesterday.

But stop there.

You always have to be wary of investing in ‘stories’ when it comes to the stock market. The market can move really fast, and you often won’t know the reason why until long after it’s actually happened.

That’s why I ALWAYS use technical analysis — studying charts — on any stock I consider buying.

This is essential to help protect and grow your hard earned money. I’ll give you an example now.

How the market tells you to wait

Gateway Lifestyle Group [ASX: GTY] is another stock that operates in the manufactured home sector to provide affordable housing to older Australians.

As I’ve said, that’s a trend I’m bullish on over time. Gateway owns and operates 53 communities across Australia.

In April the company completed a retail entitlement offer to raise close to $80 million.

That’s was on top of $40 million raised from institutional investors. This was to fund acquisitions and pay down debt. It had no problem getting its hands on the money.

In late July I saw one analyst say GTY presented value for fundamental investors around $2.90.

At that time there was the suggestion that Gateway may even acquire National Lifestyle Villages — yep, the same one the Singaporean wealth fund is after.

The point is this: at the time everything pointed to having a bullish bias on this stock. Everything except for one thing: the chart.

I bring it up now because it’s a good example of how technical analysis helps with timing and choosing your investments.

Let’s go back in time a bit. One way to learn about markets is to study past moves.

So imagine for a moment you were considering buying GTY at the end of July.  This is what you see on the weekly chart:

graph
Source: Optuma
Click to enlarge

Those two green lines are annotations to highlight what’s called a symmetrical triangle in technical analysis. The tops are generally falling so the top line is descending. The bottoms, however, are generally rising. So you have a down slant and an up slant on either side, which are squeezing the price into an apex.

The idea here is the stock is coiling and will either go one way or another. You don’t know which way. It’s a pattern that can’t be pre-empted, so in one sense it isn’t as useful as other technical patterns.

A symmetrical triangle happens when the market genuinely does not know what’s next for the stock, but is waiting for something coming.

So what good is this pattern? It tells you to wait. Don’t do anything until the market gives a clear signal. Keep your money on the sidelines.

I mentioned earlier that, overall, the publically available information would have given you a bullish bias to GTY in July. Well, that was at least true for me.

Here’s the current chart up to yesterday’s close…

graph
Source: Optuma
Click to enlarge

You can see that Gateway broke towards the downside in August. That told you enough to stay out of the stock for the moment.

Gateway released their full-year results on August 30. A read of the results reveals things came in pretty much as the prospectus forecast.

Regardless of the results, the share price dropped heavily. The market is not happy about Gateway’s outlook and details for the upcoming year.

Now Gateway the company may in fact be going along OK. But with any shares, you are buying and selling the stock.

So your money is hostage to what that stock is doing on a daily basis. This supply and demand dynamic is what technical analysis is designed to look at.

So can you see how useful some basic chart reading and pattern recognition is? The chart was telling you to watch and wait. That’s useful knowledge to have.

It means that, if you had read the piece from the fundamental analysis, you would not have acted on it, and got stuck riding Gateway on the way down — no matter how compelling the story.

This is one example of the way charting and technical analysis can keep you out of trades and decisions that will lose you money.

It can also put you on the trends that make you money. If you’d like to know more about how it can do this, go here.

All the best,

Callum Newman,
Associate Editor, Cycles, Trends and Forecasts

From the Port Phillip Publishing Library

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