I'm a discretionary technical trader. I hunt for volume breakouts and have designed systems looking for new trends forming on surging volume. Some of my favorite setups and patterns are SMASH patterns (explanation follows). Surging volume is critical to this pattern and in general of my trading strategy. I want to get into a stock when a new uptrend starts, and the volume is pouring into it a few hundred, possibly thousand, percent more than the average volume, say, the past month. My goal is to ride it as long as it remains in the trend and the volume hasn't dried up. Using this approach, I very often catch high-flying nano-cap companies making large moves on surging volume.
In addition, I find that superficial fundamental research provides me with a, somewhat, solid foundation to put on my technical trades and makes me more comfortable holding a position overnight, for as long as it remains in the new trend. Since I'm not a student of fundamental analysis, my fundamental research is superficial. This is an advantage and a disadvantage. However, for me, the advantage of spending minimal time and energy on fundamental analysis provides me ample time to be where I thrive, in the charts.
"Relm, Relm Wireless Corporation, with an excellent weekly setup. Technically, you see the suspense building. Repeat patterns. Price above the 50 on volume after scraping it, bangs head on 200, but with a high of 2.1. Pretty much under it the entire time, range bound between the 200 and 50/10. Tomorrow's the last day of this weekly candle. The candle could close tomorrow, with a confirmed 200 breakout candle on volume surge. SMASH pattern, RSI pointed UP, MACD positive, this trade looks great. Okay, but let's not forget the volume is THIN. So thin it could hurt. Or be beautiful. Relm is a micro cap with 26M market cap. 11.54M shares in the float, 13.54M shares outstanding. Relm could run much higher from here. I like the odds of the pattern developing."
Technically, I love the pattern. Naturally, I wanted to learn more about the company.
Superficial fundamental research
What does Google Finance have to say about Relm?
"RELM Wireless Corporation (OTCPK:RELM) provides two-way radio communications equipment. RELM designs, manufactures and markets wireless communications products consisting of two-way land mobile radios, repeaters, base stations, and related components and subsystems. Two-way land mobile radios can be units that are hand-held (portable) or installed in vehicles (mobile). The Company's P-25 digital products and the Company's analog products function in the VHF (136 megahertz - 174 megahertz), UHF (380 megahertz - 470 megahertz, 450 megahertz - 520 megahertz) and 700-800 megahertz bands. The Company offers products under two brand names: BK Radio and RELM. BK Radio-branded products serve the government and public safety market and RELM-branded products serve the business and industrial market.
BK Radio-branded products consist of land-mobile radio equipment for professional radio users primarily in government and public safety applications. RELM's P-25 digital products are marketed under the BK Radio brand. RELM-branded products provide two-way communications for commercial and industrial concerns, such as hotels, construction firms, schools, and transportation services. The Company provides products to a range of customers, including emergency, public safety, homeland security and military customers of federal and state government agencies, as well as various commercial enterprises. The Company's two-way radio products are used in harsh and hazardous conditions."
Nothing too exciting there.
Any recent Relm news to explain Thursday's large 9.7% price breakout and massive volume breakout? No, the only recent news I found is dated February 12, 2013 and states that Relm was awarded a Maryland State contract. However, looking at the chart, this news appears to have little or no effect on Relm's price action at that point in time and doesn't appear responsible for the current breakout trend.
Has anyone written recently about Relm on SA? Arie Goren did on December 1, 2012 here. He describes his filter explaining how he found Relm as follows.
"The screen's formula requires all stocks to comply with all the following demands:
- Earnings growth estimates for the next 5 years (per annum) of greater than 20%.
- Price to free cash flow of less than 10, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
- Long-term debt to equity of less than 0.1.
- The PEG ratio of less or equal 0.60."
Arie continues, saying that his filter provided him with only three companies, one of which was Relm. He states,
"RELM Wireless has no debt at all and it has a very low trailing P/E of 12.07 and even a lower forward P/E of 8.45, the PEG ratio is very low at 0.54. The price to free cash flow for the trailing 12 months is very low at 7.36. The company has a very strong growth prospects; the EPS growth for this year is 25.49% and the expected EPS growth for the next year is very high at 100%, and the average annual earnings growth estimates for the next 5 years is also very high at 22.50%.
The RWC stock is trading below book value, the price to book value ratio is only 0.77 and the current ratio is very high at 5.14. The company is trading 19.52% below its 52-week high and has 314% upside potential based on the consensus mean target price of $7.00. On November 14, RELM Wireless reported its 3Q financial results. On that occasion, the company said that for the quarter ended September 30, 2012, sales totaled approximately $8.1 million, compared with approximately $7.0 million for the third quarter last year. Pretax income for the quarter ended September 30, 2012 was approximately $1.4 million, compared with approximately $939,000 for the third quarter last year. The very low multiples and the strong growth prospects make the RWC stock very attractive."
Arie wrote about Relm more recently on February 18, 2013 here. He describes how he found Relm as follows.
"I have searched for very profitable companies with very low price to cash flow among Technology sector stocks. Those stocks would have to show also a very low debt. I also looked for companies that are in short-term uptrend, in mid-term uptrend and in long-term uptrend. Stocks in an uptrend are performing well and are in a buying mode."
In his more recent piece, Arie says,
"RELM Wireless has no debt at all, and it has a very low trailing P/E of 12.68 and even a lower forward P/E of 8.75, the PEG ratio is very low at 0.54. The price to free cash flow for the trailing 12 months is very low at 7.62. The company has a very strong growth prospects; the EPS growth for this year is 25.49%, and the expected EPS growth for the next year is very high at 42.86%, and the average annual earnings growth estimates for the next 5 years is also very high at 22.50%. The RWC stock is trading below book value, the price to book value ratio is only 0.80, and the current ratio is very high at 5.14...
On November 14, 2012, RELM Wireless reported its 3Q financial results. In the report, the company said that for the quarter ended September 30, 2012, sales totaled approximately $8.1 million, compared with approximately $7.0 million for the third quarter last year. Pretax income for the quarter ended September 30, 2012 was approximately $1.4 million, compared with approximately $939,000 for the third quarter last year.
The very cheap valuation metrics, the strong growth prospects, and the fact that the stock is in an uptrend are all factors that make RWC stock quite attractive."
Both articles makes mostly a fundamental case for Relm and sound pretty good to me.
Let's take a look at Relm's financials. Who wants to study a balance sheet, income statement, and cash flow statement of a company? Lots of people, probably including Arie. However, I'm not one of them. But I do love charts! And Google Finance provides an easy way to view some of a company's important fundamental information in the form of a chart here.
In Relm's case, it looks pretty good (I've certainly seen worse). Relm's income statement shows that they have been profitable the past two quarters, and might even make a profit for 2012. Their balance sheet appears to be stellar, with zero debt with nice big asset bars.
Now, for some really lazy fundamental analysis. I like to get the opinion of Louis Navellier. Navellier offers a service called Portfolio Grader. It's free, easy to use, and provides a quick fundamental analysis. He fundamentally grades a company based on sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow, and return on equity. Every week on Sundays, he re-grades everything in his database. Navellier gives Relm a fundamental grade "B" here on their report card.
Also, I often check to see if earnings are due to report while I plan on holding a stock. I don't want to hold a trade overnight without knowing when the company is going to report earnings next. (I have been burned too many times, although it has worked out in my favor too.) Yahoo's Earnings Calendar doesn't appear to know when Relm reports next. Neither does Investor Relations on Relm's website. (I have an email out to them.)
According to Google Finance, Relm has 13.55M shares outstanding (excluding dilutive securities). As of the close on Wednesday (2/20/13), this nano-cap had a market cap of $23.71M. Just two days later on Friday (2/22/13), Relm made a new 52 week high and its market cap ballooned to $29.4M, accounting for a huge two day run of 24%.
Let's get technical: SMASH breakouts on volume surges
Here's a daily chart of Relm, as of Friday's (2/22/13) close (200MA is orange, 50MA is blue, and 10MA is pink).
Here's a weekly chart of Relm, as of Friday's (2/22/13) close (200MA is orange, 50MA is blue, and 10MA is pink).
On Thursday (2/21/13), I discovered Relm by scanning all stocks in the market for potential breakout candidates that are pointed in the right direction with a surge of volume. I was presented with a list of around 20 of which one was Relm. I quickly noticed the SMASH breakout pattern forming on the weekly chart.
Over the eight years that I've been trading full-time, I've studied countless setups and patterns that I've seen in the charts. One of my favorites, I call SMASH. SMASH is a signature breakout move where price SMASHes through the 200MA (think of a baseball player SMASHing a ball out of the field) on surging volume after it has been channel trading between the 50MA and 200MA (with the 200MA above the 50MA).
A SMASH move, like all things on a chart are fractal and can occur on any time frame. However, weekly SMASH moves are more powerful than those of lesser time frames. They tend to see more dramatic returns than SMASH patterns of lesser time frames and tend to be more reliable than SMASH patterns on lesser time frames.
On Thursday (2/21/13), Relm's SMASH on the weekly chart was developing (here).
On Friday (2/22/13), closing on the new high on the weekly candle, the SMASH pattern is confirmed, and Relm is officially on the move. The weekly candle of Relm is gorgeous, closing at the high of week.
Relm's weekly chart is a great example of a confirmed SMASH move that developed a new up trend on surging volume. Relm broke up through the 50MA, then traded up to test the 200MA and failed it, a few times. These failures are important and make for the best SMASH setups soon after. As would be anticipated in a SMASH play, Relm pulled back from the 200MA, riding the 50MA a few times, only to SMASH through the 200MA on a massive surge of volume.
Follow the volume breakouts
To say that volume is surging on the weekly chart is an understatement. The latest weekly volume bar, closing on Friday (2/22/13), is 600,137 shares, or 188% more than it was just one weekly volume bar before (208,164), and, get this, 892% more than it was just two weekly volume bars before (60,504).
Twenty days (one month) just before Thursday (2/21/13) and Friday's (2/22/13) massive volume bars, Relm traded a paltry average of 19,053 shares for the month. On Thursday (2/21/13) alone, Relm traded 304,739 shares, or 1,499% more volume, dwarfing the average for the month before. Relm saw a continuation move the following day, Friday (2/22/13), with volume of 236,774, or 1,143% more volume, again dwarfing the average for the month.
Relm is a nano-cap with large room to the upside. It's new weekly uptrend has just begun with celebratory fireworks (SMASH and volume breakout) and it's screaming to us that it is in gear. If it can get past the minor resistance at 2.4 to 2.5, it's next test will be in the low 2.8's. With a Friday (2/22/13) closing price of 2.17, this leaves plenty of room for the uptrend and some outstanding profits.
However, as all traders know so well, some trades work, and some don't. Although I think the technical odds are very much in favor and that I will be handsomely rewarded given this trade's risk/reward ratio, I will be prepared to sell my position when Relm is no longer trending. However, while Relm continues to stay in the trend, I will be buying the dips, and recommend other traders add Relm to their watchlist if it fits their trading profile, as the gains ahead will likely be outstanding.
Disclosure: I am long RWC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.