6/27/14 WSTI Short Trade Recap

As some of you may have noticed, recently I've been taking some time off from blogging, in part due to the OTC market being so slow. However, I've received a few questions about my WSTI short and thought that it might be beneficial to do a trade recap.

The Setup:

Let's begin by examining the daily chart entering the day:

When examining this chart, here were my initial observations:

     - 6/19/14 was the first day of significant volume; therefore, I consider that the start of the promotion. The chart action prior to that is irrelevant to me due to the low volume.

     - Every single day since the beginning of the promotion, the stock closed green; therefore, I consider this an overextended stock that should collapse hard when it finally cracks. It helps that it is a known promotion.

     - 6/23/14 the stock went significantly red, yet it managed to recover and close near highs. The next day it broke out past $1.55.

     - Every day following the breakout, the stock has gone red, yet it recovered to close green. This tells me that a g/r move may not be what triggers a total collapse.

Normally when I'm looking at an overextended daily chart, I'm looking for large morning spikes to short into or a g/r move to signal a trend break and impending collapse. As noted above, in this case I believed that g/r would not trigger the collapse, that it would take a different sort of trend break. During the previous trading day, WSTI had a very strong open before a negative seeking alpha article was published, causing the stock to pull back.

WSTI pulled back to about $1.80 because of the negative article before quickly recovering. Since the daily chart had produced higher lows every day since the breakout, and $1.80ish had acted as the bottom of the panic after the negative article, my theory was that $1.80 could act as the trend break that would lead to total collapse.

Morning Action:

Unfortunately, WSTI shares to short were very difficult to come by. Up until the previous day, they had been impossible to find. My favorite broker for OTC stocks, Centerpoint, briefly had shares to locate of WSTI the morning of the 27th. I decided to pay the locate fee of $.05/share for 10,000 shares, because I knew there was massive downside potential if the stock collapsed, and I didn't want to be without shares if a shorting opportunity presented itself. 

WSTI gapped up to $2.17, and after a quick pullback to $2.12, it managed to spike up to $2.25 before running into resistance. I was definitely watching the spike for a short opportunity, but ultimately I decided that it hadn't spiked high enough for me to short into the strength. After a brief period of consolidation, WSTI began to crack its $2.12 low of the day. I decided to take this opportunity to initiate my short position and wound up with roughly a $2.11 average. But why did I short here? It wasn't into a spike, and it wasn't on the $1.80 breakdown level I thought might be key. There were a couple of reasons:

1. The low-of-day crack was still a very bearish move. I expected there to be SOME pullback at least, and if the stock looked like it would hold up, I could just close my position for a small gain or loss.
2. 10,000 shares is not a large position size for me. If I were to stay patient/stubborn with my position, I knew I could always locate additional shares the next morning and look for a spike to add into short.

I watched the stock bounce slightly after the pullback to $2.00 and knew that ultimately I wanted to use the morning high of $2.25 as my risk level. If WSTI had started to perk up and look like it might break past that high, I would have probably cut my loss and tried again later into a spike. The $2.12 support level began to act as resistance instead, though, and after failing to break through WSTI faded back again.

The rest of the day, WSTI turned into a slow and steady fader. While there were small bounces along the way, there was never any action to indicate that the trend was reversing. Once WSTI broke below $1.80, I knew the stock was toast and should continue to fade. The chart was broken. I would have added to my short on the $1.80 crack, however, I was unable to find additional shares. I considered covering some of my short into the fade, but since it was going to be the first red day for WSTI, I thought there were decent odds that there would be additional washout the next morning.

The Cover:

Monday morning WSTI had a pretty large gap down, from $1.35 to $1.14. I already thought this was a rather large move down, and upon reading the level 2 I thought I saw bottoming action right out of the gate so I quickly covered up my position at $1.11. The level 2 action turned out to be a fake bottom, but I had no regrets locking in my profits as I had played it safe and hadn't opened myself up to potentially getting caught short into a large bounce. 

WSTI had fallen 50% off of its highs in one trading day, which was more than good enough for me. Had there been a large bounce at some point, I would have definitely considered a reshort. I never quite got the price action I was looking for though, so I simply moved on to a new stock because the play was over! 

Question: "How Does Your Strategy Change in a Bear Market?"

"Sell in May and go away" is an expression commonly heard in trading circles. Veteran traders know that the summer can tend to be slower, especially in the OTC market. The first few months of 2014 were the craziest three months of trading in the OTC market I have experienced since I began trading. I couldn't believe the number of plays we had on a daily basis, and it seemed that every time one died, another would immediately surface. Finally, we are beginning to see action slow down, and many traders are left wondering what to do.

I have been asked a number of times about how my strategy changes as the market shifts. To be completely honest, my strategy barely changes at all. If anything, I become slightly more short-biased, but this really only applies if it is a very bearish market. However, I am still watching the same chart patterns, I am still looking for the same setups, I continue to take the same approach as I would on any other day.

There are far fewer runners right now than there were in early 2014. All this means is that I must be more selective as a trader. I don't find different setups to play to keep myself entertained. If there's no setup, then there simply is no play. It is perfectly fine to go a day or more without even making a trade if the setups that you're comfortable with don't present themselves.

The natural question you might be left with is, "If I don't trade as much, won't my profit rate decline?" Unless there are a couple of truly spectacular setups in a slow month, yes, this will be the case. Trading does not provide a steady monthly salary. Some months will be great, some months will be a bit slower. The key to making it as a trader is remaining consistently profitable. Every day, no matter what kind of market we're in, I play the same chart setups I've been playing for the past two and a half years. As a result, I have never had a losing month and very rarely even have a losing week. I survive market slowdowns/downturns because I focus ONLY on the patterns that work for me, even when there are very few of them in the market.

I hope this helps clear up any confusion!

Question: "Which Broker is Best for Me?"

Before reading any further, please take a moment to review my first post on brokers. I will do my best to update this post anytime there is a significant change.

I am often asked by new traders to give my opinion on which broker would be the best fit for them given their circumstances. Since I can't take the time to reply to all of these questions individually, I thought that I would rank brokers I have used based on certain criteria. Of course, this is all my opinion only. Keep in mind this only covers brokers I have experience with; there may be other options out there. If you don't see a broker on this list, you'll have to try it for yourself, because I will have no opinion on it.


Brokers I Would Use for Short Selling:
1. Centerpoint Securities
2. Interactive Brokers
3. Speedtrader

If you want locates, these are the only brokers that will be able to get them for you. By far, Centerpoint has the best borrows - it isn't even close. Even if a stock isn't easy to borrow there at the start of the day, there are other ways to get a locate on it. To short-sell pump and dumps, these are the only three brokers I would consider.

Brokers I Would Use for OTC Executions:
1. Centerpoint Securities
2. Speedtrader
3. Etrade
4. Interactive Brokers

Speedtrader recovered most of their OTC routes, and they added CDEL to their list which is a huge help. Centerpoint has the best executions, mostly because I feel their NITE route offers better executions than Speedtrader's. They also offer routing options to CSTI, ATDF, CDEL, ARCA, and a few others. Etrade won't let you pick specific routes, so that definitely limits your ability to get a fill sometimes.

Brokers I Would Use for Trading Cheap Stocks:
1. Etrade
2. Speedtrader
3. Interactive Brokers

If you want to trade sub-penny stocks or anything even remotely cheap, you need a broker that won't eat you alive with routing fees and commissions. Speedtrader and Etrade don't charge on a per-share basis for their routes, which helps keeps fees cheap and under control. Centerpoint does charge per-share though, so fees add up VERY quickly on the cheaper stocks you need to trade large amounts of shares with. Interactive Brokers makes this list because their commission structure is .005/share OR 0.5% of total trade value, whichever is cheaper. At the end of the day, they will also be a cheaper option than Centerpoint.


Please let me know if there are additional categories you'd like to see me break down. I will also do my best to update this post as I gain experience with new brokers. Hope this helps!

Trade Recap: GNKOQ Afternoon Breakout

Afternoon breakouts are one of my favorite long setups, and today GNKOQ gave us a perfect example of one. GNKOQ was trading on the OTC exchange for the first time ever, as it had finally delisted after its bankruptcy.

GNKOQ opened with a strong morning spike, then spent much of the day consolidating. I included the chart above because I believe it is important for people to get an idea of what the chart looks like BEFORE the move happens. I believe it was around midday that I really started watching GNKOQ, because I thought that after a lengthy period of consolidation, the stock could spike nicely if it broke out past its morning high. I prefer breakouts in the afternoon, so I was in no rush for GNKOQ to make its move. Finally, about 20 minutes before close, it made the move I was looking for.

GNKOQ perked up around 3:40, breaking past the morning high of $1.78. Unfortunately, I had my eye on something else at the time and was a bit slow to act, missing the initial break. This is where a lot of traders will get frustrated with trading OTC stocks. Even if you're quick with your buy order, you will find, in most cases, that it is tough to get an execution into strength. Just because I missed the breakout move didn't mean that the play was over, though. 

I am including the zoomed-in chart above because I want you all to notice something. After GNKOQ broke $1.78, it quickly spiked to $1.84. However, GNKOQ then ran into a bit of trouble and had a pullback to $1.80. Some traders would get spooked in this situation and sell because the stock started to dip. However, I take the opposite approach. I believe pullbacks and consolidation are healthy. If I would have been willing to buy the stock at $1.80 on the way up, why wouldn't I be willing to buy it at $1.80 here on the pullback just a few minutes later? It is this first pullback after a breakout where I find myself buying time and time again, especially in afternoon situations. In this case, I wound up buying 10,000 shares of GNKOQ at $1.80. Had the stock dipped further, I would have added to my position. After a long day of consolidation, my risk level was $1.70. 

GNKOQ wound up having a fantastic breakout move, pushing all the way up to $1.96 before pulling back slightly into the close. I sold about 3000 of my shares at $1.93, and I'm taking the rest overnight, looking for a morning gap-up and spike. In the morning, I will either sell my shares into a spike or if the stock looks like it will go g/r. 

So here are a few key things to take away from this post:

1. I prefer afternoon breakouts and usually wait for the breakout to happen before buying.

2. I don't chase spikes if I miss my fill; I wait for pullbacks. 

3. If a move exceeds my expectations, I will usually lock in some profits.

Question: "Will You Give Me Your Full List of Promoters?"

Sorry, but this is no longer something I'm going to provide. I'm barely staying on top of it myself. A lot of the information in my current spreadsheet is outdated (which many of you have noticed). A large part of the reason for this is because, recently, I find myself trading off of stock scanners more than anything.

There are very few effective promoters out there right now, so don't worry, you're not missing much. Stocktips remains my favorite promoter to play. I will continue to scalp their picks when new alerts go out. They're the closest thing right now to a replacement for Awesome Penny Stocks. It is important that I note that their "premium" paid service is scam, do not pay them because you will not get picks early! Should any other promoters surface, I will be sure to keep everyone posted!

Question: "How Should Small Accounts Avoid the PDT Rule?"

There's no denying that the pattern daytrader rule causes huge frustration for many new traders. I often get questions about how to best deal with this rule. While I can't advise you on what decision you should make, I can outline the route that I took when I first started:

• Open Multiple US Accounts

In the US, you are limited to three daytrades every five business days. If there are certain US brokers that you have your heart set on, one option is to open multiple accounts. That way, you get three daytrades at each broker. This is the strategy I used when I first started. I had accounts at ThinkorSwim, Speedtrader, and Interactive Brokers. Interactive Brokers does have a $10,000 minimum to open the account, but once it is opened, you can immediately pull most of that money if you so choose. There is no minimum balance requirement to my knowledge. By using three brokers, I got nine daytrades every five business days. Once I reached a total of $25,000, I chose which broker I was happiest with (at the time it was Speedtrader) and merged all of my money into that account.

I will not tell you which option is best for you. This is an example of something that is best to learn for yourself. I believe both can be good options, though, so take a shot with one of them - and if it's not working, don't be afraid to change it up! 

Why I'm Concerned for the #Wolfpack

Before I receive dozens of angry emails, let me start by saying that this post is not meant to bash the latest twitter sensation, "WolfOfWeedSt." In fact, I've been quite impressed by some of his picks so far and how much they've run from where he initially called them. What concerns me is the cult-like mentality that has taken hold of this "Wolf-pack," because I've seen it far too many times and know it's just a matter of time until the bubble bursts.

The Wolf recently received quite a bit of publicity, as he was featured in this BBC article about Weed stocks. In this article the Wolf says, "I've started to treat the whole sector like a giant game of Frogger, I ride the wave and then jump." So why are so many of his followers obsessing about company fundamentals as if these are long-term investments? I also am curious as to why so many #wolfpack members seem quick to ignore where this wave of momentum comes from in the first place.

I have to give credit where credit is due - FRTD offered a fantastic spike yesterday upon announcement:

Let the chart tell the story. I think it's obvious what time the tweet about FRTD went out. In the first ten minutes after FRTD was mentioned, it traded roughly 30 million shares and skyrocketed from $0.041 to $0.075, an 83% move. FRTD didn't spike because it suddenly had better fundamentals or a better long-term outlook - it spiked because someone with a large following tweeted about it. Am I complaining? Absolutely not! Spikes like this are what I used to love to play with promoters like "Awesome Penny Stocks." Most of the time, when you see quick spikes in the OTC market, it is on light volume and very hard to take advantage of. The FRTD move happened on SIGNIFICANT volume, and I know that I plan to buy any future "WolfOfWeedSt" announcements for quick flips until he loses his flow. That is the predictable part of the trade.

So why am I concerned for the #wolfpack? Because there seems to be a mass delusion out there that these Wolf picks are going to be the next big thing. I suppose I can't say with certainty that they won't be. Unfortunately, the reality of the situation is that if you're investing longer term in OTC stocks, you're playing a game in which the odds are massively stacked against you. Take the time to review this study if you don't believe me. Here are a few of the major highlights you'll find within:

• The mean return for native OTC stocks over one year is -33.82%
• The median return for native OTC stocks over one year is -53.9%
• 75% of native OTC stocks declined by 13.97% or more in one year

(A native OTC stock is one that has never traded on a major exchange.)

Take the time to read the entire study and you'll see there's plenty more where this comes from. No matter how you break it down, the vast majority of OTC stocks fail in the long run.

In addition to the overwhelming odds facing long term OTC holds, there are dozens of #wolfpack tweets that are just flat out sickening to look at. If a stock goes down, of course the consensus is that short sellers are attacking it. This is a laughable claim, especially for stocks like $MINE, where the $2.50 rule would make it impossible for shorts to take any kind of meaningful position size. Or sometimes you just see disgusting tweets (and retweets) like the one below:

Yes, this is just your typical promoter BS used to suck in newbies. Of course the chart usually tells the story, and some of the earlier "picks" are starting to look like your classic pump and dump pattern:

There's no denying that both of these picks had considerable upside from the time of their announcement. Perhaps one or both of these can even offer another breakout before the hype is over. If I had a position in either of these stocks though, I'd be asking myself two things:

1. At what price did the "Wolf" and the other #wolfpack leaders buy their shares?
2. How much did I pay for my shares?

It doesn't matter how quickly I react, I'm willing to bet I will wind up paying a higher price every time. I would never convince myself to hold and hope from higher prices, especially after momentum starts to break. I certainly hope nobody reading this ever will either. 

I will continue to treat "WolfOfWeedSt" like I treat anything else on the OTC market - I will trade based off of the chart alone. I love the volume and volatility he brings to the market, and I plan to actively trade his picks, both long and short, as long as I see a high-odds setup to do so. Like the Wolf, I will "ride the wave." I just hope my readers won't be some of the #wolfpack members that will still be riding long after the wave has crashed.

Disclosure:

I am not, nor have I ever been, short MINE, SPLI or FRTD