By now, you all know I put waaaay more trust in chart patterns than I do BullShippers like corporate management and ANALysts. Stocks trading under $5 all have unique mind-blowing stories, but their fundamentals are non-existent, which is why I think they and everyone involved with them are full of BullShip! And, that’s why I look to short sell these stocks, preferably into spikes. To get a better sense of how to do that—their patterns are constantly evolving—I like to look back at some recent plays and see how they played out. Hindsight is easy, but the past helps us to better take advantage of future opportunities.
Biotech Cell Genesys (CEGE) is a great example. With a $200 mil marketcap, it trades at 150 times sales (do the math kids), has $30mil/quarter in losses and dwindling cash reserves. Corporate management says everything is rosy—pinning their hopes on their drug pipeline—but nobody pays them much mind considering the near perfect bearish yearly chart below.
But last Friday morning, positive cancer drug trial news spiked the stock from the $2 to the $2.75 range before falling 40 cents off its high on big time volume of nearly 8 million shares, up from the norm of a few hundred thousand traded daily. On Tuesday, ANALyst Joseph Pantginis reaffirmed his price target of nearly $8, whining that the market isn’t correctly valuing their recent positive news.
TIM Lesson: The market is never wrong, but ANALysts usually are.
Despite overwhelming evidence that their calls are complete BullShip, many poor schmucks still listen to ANALysts, spiking CEGE’s daily range to $2.75-$3 on even bigger time volume of 11 million shares.
Here’s where it gets interesting—overly ambitious short sellers saw all these variables and decided to get short into the market close, probly anticipating another 40 cent drop off of the $2.83 closing price. Buuuut they forgot that the volume was still strong and the stock could still squeeze them. At the open the next day, squeezed they were as CEGE surged all the way to $3.35 in the first hour of trading—no new news at all, just a squeeze—before fading throughout the day and closing at $2.98 on volume of 11 million shares again, even though most of that volume was due to the morning squeeze.
Thursday and Friday were different stories altogether, massively fading volume and price, Thursday volume was 5 million—the price dropping steadily all day closing at $2.62 and today, the volume might reach 2 million, down another 10 cents on the day to $2.50, but not much more.
So, how should you play this kind of smallcap spike. How did I play it? Well, I tried shorting into the spike at $3.35. Unfortunately, since my timing sucks, I didn’t think this stock was up enough, I wanted the run to continue another day or two and because I hate shorting directly into spikes (you’ll hear me say I much prefer shorting into a crack in the sideways price action), I missed my execution by a penny or two and refused to chase it down. Oh well, you live you learn.
Perhaps we can get a better sense of when to buy, sell and short if we look at some charts over multiple time frames—namely a 6-day, 6-month and 1-year chart.
In the above chart, you can see, the quickest way to profit would be to buy intraday into the high volume spike. Many traders do that, but it’s not for me because you risk just as quick 40 cent intraday drops. Shorting into spikes also looks decent, but unless you short at the peak spike, you better cover quickly because the high volume means it’ll probly keep running and you never know when it’s gonna stop.
You can see in the charts below that when the stock closed above $2.75 (broken support from early 2007, resistance from December 2007) (when a stock breaks support, it becomes resistance on the way up, due to all the bitter shareholders looking to sell and breakeven)
But, if you like taking risks, in the charts below, you can see some nice former support (from last July, August and October) / now resistance around $3.25 (its brief spike to $3.35 shows you how inexact smallcap technical analysis is), so that’s not a bad time to short some (as I tried to do)
But the safest/highest percentage play would be to short during the afternoon after the stock spikes to $3.30-ish because the shorts have been squeezed out, the wall of sellers has entered (meaning every time it tries to spike again, the lack of buying volume is met by plenty of sellers), perhaps shorting into the close when a last hour spike attempt fails to close the stock over $3. I prefer a stock to short stocks that have gone negative into the close, but a 15 cent daily gain is practically the same thing (again, nothing is exact in this niche). Then, if you have some patience, wait 1-2 days and you get a nice gradual drop–free of scary spikes–to the $2.50-$2.60 range. Sure, there could be a little more downside, but aside from the all the BS, there was some positive news, so I don’t expect a drop all the way back to $2 and, more importantly, when you’re short, you gotta watch out for those nasty Friday afternoons when short sellers tend to cover their positions before the weekend.
Posted in ANALysts, Breakdowns, DVD, Fess Up Time, Patterns To Short, Short Selling, Supernovas, TIM Lessons