The Bullish and Bearish Signs of Penny Stocks and How to Play Them

One of my favorite trading challenge students Julie is back with yet another guest post!

Read her past great ones “13 different types of Wall Street Players” and her explaining what penny stocks actually are.

Definitely read her great blog on stock trading here and enjoy “The Bullish and Bearish Signs of Pennystocks and How to Play Them.”

First, let’s make sure everyone is on the same page when it comes to the meaning of “bullish” and “bearish.” A bull market is one where you expect the price of stocks to continue rising in price and you would make money by buying the stock. A bear market is one where you expect the price of stocks to fall in price and you would make money by selling the stock.

When it comes to pennystocks, Tim Sykes’ specialty, there are several bullish and bearish signals that you should watch for if you want to be a successful trader.

Bullish signs include earnings, financing, partnerships and positive industry news.

Earnings are bullish when they include positive revenue growth, a positive outlook on future earnings, among other things. Earnings are reported on a quarterly basis and are typically available on websites like yahoo finance. An example of revenue growth showing positive earnings would be if the company had revenues of $1,000,000 and expenses of $500,000 in the third quarter and revenues of $2,000,000 and expenses of $650,000 in the fourth quarter.

A new financing deal for the company means that investors are buying into a company’s story. This means that people are willing to give the company money in return for shares of stock. The more capital raised and reputable the investors, the greater the odds of success are for the firm. This is particularly bullish if they receive financing that prices their shares at a higher value than they were at currently. For example, say company XYZ receives financing at $15 a share when their current share price is $10. This is positive because it means that the investor believes the company’s stock should go up in price.

A partnership is where two or more individuals come together to manage a business. Whether they are meaningful or not, these are known to hype penny stocks and drive up their stock price.

Positive industry news can be a bullish sign at certain times, as stock prices tend to rise with expectations. When the overall industry is doing well, this can be a positive force for that particular stock.

Now for bearish signs. Earnings is on this list as well, since if the company reports slowing revenue, stagnant growth, or fails to meet analyst expectations, the stock price is likely to decline in value. Instead of the positive earnings example we had earlier, say that same company’s fourth quarter revenues were $800,000 and expenses were $650,000. This is a decline is revenue and an increase in expenses, which is not a good combination.

Financing is also on this list. If the company gets financing at a large discount, this is a bad sign. For example, imagine the stock price is $10 a share, and they get financing at $5 a share. This means that someone just bought their stock at a 50% discount, and investors are likely to sell on this news.

Rumors are not necessarily bearish, but they are extremely risky and you should not buy or sell a stock on a rumor. You may be right some of the time, but it is not worth the risk. There are far too many good plays out there! An example of a rumor would be that a company is supplying certain parts needed for the new iPhone from Apple. If the rumors are true, the stock price should rise in value, and even on just the rumor they will probably rise. But if it turns out to be false, then there could be a fast, dramatic decline in the stock price.

Finally, negative industry news is a bearish sign. Even if the company seems to be in good shape itself, if the rest of the industry begins to suffer, investors are likely to see tough signs ahead for that particular company as well.

So taking these eight signs into account, what are some strategies to help you become more profitable?

Be nimble. Expectations can change fast, so reserve your capital so you can take advantage of these changes. When expectations change, the stock price will move, sometime dramatically, in one direction.

Be conservative. You never want to risk too much of your capital in any single play. Your capital is the amount of money that you have in your account available to buy or short sell stocks. Tim trades a large number of shares, but it is rarely over 10% of his capital base.

Be thorough. Don’t get lazy and make sure that you do the necessary research. There is a lot of random noise out there, but if you skip over something, you risk missing a great play. If you want to learn how to find these great plays, I suggest getting “TimFundamentals.” It provides a great introduction as to how Tim goes about doing his research and finding the best plays in the market.

Monitor the overall market. Three out of four stocks follow the market, enough said.

Always, ALWAYS monitor you positions and open orders. Keep track of what stock(s) you currently have in your portfolio and what orders you have placed. This is especially important in penny stocks, as they move very fast.

Monitor the news. Penny stocks are not impacted by the news as much as typical stocks, but they are still impacted none-the-less. Watch things like what the FED is doing, what is going on in Europe, any sort of news on Wall Street, etc.

Take losses/gains quickly. When it comes to losses, it is better to admit you are wrong before it is too late. You don’t want to end up having a huge loss and getting discouraged or worse yet, losing the majority of your capital. This is one of Tim’s number one rules. When it comes to gains, it is better to exit too early than too late. Trades can reverse and turn into a loss if you wait too long. This is not investing, it is Pennystocking.

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  • MoneyMyke

    Post more Vids on Youtube

  • NeverSayNever

    Keep ‘em coming!