This week's lesson.
Today I want to go over some tickers that look action-packed but don’t meet pattern criteria or run on thin volume in reality.
The first runner I want to discuss is $HUNT because this stock went from $10 to $103…
…but had little volume that never went above 700,000 throughout the entire day. When we are looking at penny stocks, we want the volume to be around 4 million and cap at 40 million, otherwise you’ll be looking at a massive spread, and it won’t be easy to find a reasonable execution price. Another reason why you don’t want volume below a million is the lack of liquidity. Low liquidity stocks are dangerous and have the possibility to be run by just one individual that bought up the entire float. We’ve discussed before the dangers of having a sole trader controlling a stock because of their uncertainty…
The uncertainty is the kind of buy-up can dump you out at any time when they decide to sell everything.
$GBR had a similar volume right under a million but showed us an important factor.
It showed us how important discipline is when looking at patterns. Previously, this stock had bounce shorts after going from $4-$13 and then dumping back to $4 in one day. Looking at $GBR now, we can see a volume estimate breaking previous resistance around 10 million, which isn’t considered heavy, and it is why I didn’t short into it even though $GBR ended up fading out. Patterns like $GBR present opportunities where you think you can go in and make money, but it doesn’t happen right away, and that’s why patience and discipline end up saving you.
I took my $GBR mindset as I approached $CLWT because this stock is tricky.
Usually, tickers that gap up and fall back 50% of their entire gain don’t come back, but $CLWT did. However, we see low float again, and those who shorted were squeezed repeatedly. You never want to underestimate the potential of a stock coming back because $CLWT shows us the risk of shorting low float when its candles have such a thin volume at 15%. Going long here is ideal because it’s best to stay away from shorting into weakness. You may get lucky, but just like at a casino, you may not.
When it comes to deciding whether to go long or short, I always favor the short side because I don’t want to be halted during intraday trading. For example, I’ve seen a stock trade decent volume on the first green day and be up 400%. This particular stock went from $.60-$1 as I went long at $.65, which put my gains at $15,000 right before it was halted. When the stock opened back up at $.40, I want instantly down 20%, and that’s the unfortunate side of going long.