When I introduced my 7-step pennystocking framework in 2011, some people called it a marketing gimmick. But it wasn’t a gimmick.
The framework was based on a decade of observation. It was an attempt to simplify things. And frankly, I didn’t expect it to keep playing out. I thought if I shared it with enough traders, the pattern would stop working.
But it hasn’t stopped working. That’s because the rationale behind the price action is still there. Thanks to greed, hype, and manipulation … the 7-step pennystocking framework just keeps giving.
In this edition of the update, I’ll share the entire framework.
Table of Contents
- 1 New Karmagawa $1 Million Donation
- 2 Trading Mentor: 7-Step Pennystocking Framework
- 3 Top Tips for the 7-Step Pennystocking Framework
- 4 Trade Review: Monster OTC Swing by Jack Kellogg
- 5 Millionaire Mentor Market Wrap
New Karmagawa $1 Million Donation
Read more about the latest Karmagawa donation here. Please share the post on social media. I’m proud to donate 100% of my trading profits to charity, but we need more traders to donate. Together we can change the world.
I'm proud to announce a new $1 million charity donation to food banks, animal rescues & to build more schools, check it out: https://t.co/QVyHVCEaZm please retweet/help me get more traders giving back as we must ALL do what we can to make this a better world for humans & animals!
— Timothy Sykes (@timothysykes) March 22, 2021
Now it’s time for…
Trading Mentor: 7-Step Pennystocking Framework
The pennystocking framework and its variations still play out. It’s not an exact science, but once you understand what’s happening, you’ll see it again and again.
Learn it, but don’t just memorize the patterns. Try to understand the rationale behind them. That way you can adapt to shifting markets. And the key to long-term success is adapting.
Shout out to all the bag holders on formerly great OTCs like $ALPP $ENZC $OZSC $OPTI $ASTI $ALYI as only the dumbest, laziest, most naive newbies hold through such destruction. As I warned in literally hundreds of tweets, my 7-step framework usually plays out on multi-month pumps
— Timothy Sykes (@timothysykes) March 25, 2021
I’ll cover the basics of the 7-step pennystocking framework in this edition of the update. Read to the end for information on how to learn the framework in depth.
Without further ado, here are the seven steps. I’ll include charts along the way. Remember, it’s not an exact science. Look for similarities in the charts. Notice where some numbers repeat. And notice that in some of these charts, the #7 hasn’t happened … yet.
Step #1: The Pre Pump or Promotion
At step #1, you can make big gains, but it takes time. The goal is to predict the huge spike ahead of time, regardless of the reason. This step is best for patient people with small accounts.
That said, it’s difficult to guess on plays like this. It’s tough without experience. Especially since the old-school email and mailer promotions pretty much died.
Jack Kellogg recently played the #1 with marijuana stocks. He’d witnessed the big sector run in 2017 and 2018. His thesis was that if Joe Biden won the election, weed stocks would spike. So he bought a basketful of weed stocks in January and waited.
Jack’s spent years studying the 7-step pennystocking framework. He’s arguably the best student of the framework I’ve ever had. Jack crushed it in February after holding some of the stocks for nearly a month.* Keep reading for a review of one of Jack’s trades.
(*These results are not typical. Individual results will vary. Most traders lose money. Traders like Matt and I have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose. I’ve also hired Jack to help in my education business.)
Step #2: Ramp
Back in the day, the hype came on message boards and emails. These days, it’s done by Twitter pumps and in chat rooms. Students ask me all the time how I know where the hype is coming from. My go-to source is StocksToTrade Breaking News Chat. It saves me a ton of time. Use it.
(Quick disclaimer: I proudly helped design and develop StocksToTrade and am an investor in it.)
Keep in mind … promoters use a TON of bot accounts on social media. Ride the hype, but don’t believe the BS. You’ve been warned.
When a stock is ramping, it’s possible to buy and hold for a few days or weeks. But again, you’re basically guessing that the promotion will work.
Step #3: Supernova
This is how I made my first $1 million back in 1999 and 2000.* And to be honest, I didn’t understand what was happening. I just recognized the pattern and rode the wave. I bought the breakouts.
(*Note: My results are far from typical. Individual results will vary. Most traders lose money. I have the benefit of years of hard work, dedication, and experience. Trading is inherently risky. Do your due diligence and never risk more than you can afford to lose.)
This is the most rewarding time to be long. But it’s also the riskiest. You MUST be aware that the higher a supernova goes, the more overextended it gets. Be very cautious with buying overextended stocks.
It all comes down to experience and practice. When you’re wrong (and you will be sometimes) always follow rule #1: cut losses quickly.
How long do you hold a supernova? That depends on a lot of things. Is the big move happening in one day, three days? How many days has the stock been green? You must consider many factors.
Remember, supernovas can flip on a dime.
Step #4: Cliff Dive
You know the old adage … what goes up must come down.
The 7-step pennystocking framework came from observing price action on penny stock pump-and-dumps back in the day. When I introduced it, once a promotion stopped, the bottom fell out. Stocks sometimes dropped 50% or more in a day.
Fast forward to today. Stock promoters might not use the same tools, but they still pump stocks. And when the promotion stops, the bottom still falls out. A small decline near the top turns into a full-on collapse.
This is the best time to short-sell promotions. But it’s also usually the most difficult time to find shares to short. Why? When a stock goes from 50 cents to $5 over a few days, short sellers start circling like vultures. Especially if it’s based on promotion and hype.
We’ve seen many sub-penny plays go full supernova recently. So they might get up to 10, 20, or even 50 cents a share.
So before we get to step #5, we have two MAJOR caveats here…
First, I think shorting is a flawed strategy right now. There are too many overaggressive newbie shorts in the market. It’s a crowded space and a very risky strategy.
Second, I’d NEVER short an ultra-low-priced play. Even when I was short biased, I rarely shorted anything below $1. Even then, there had to be a good reason and/or proof of a pump.
But that’s OK because I’ve learned to adapt by playing…
Step #5: Dip Buy
The panic dip buy is my favorite pattern for small accounts. For me, this is the best time to buy a promoted stock. There’s still momentum and interest. The promoters tell their followers to hold, but a lot of newbies set hard stop-loss orders. When the stop losses get taken out, it becomes a self-fulfilling prophecy.
And often there’s a solid bounce for two reasons. First, dip buyers are waiting for the turn. But also, short sellers buy to cover. A stock can run 50% or more in a few hours or days. Sometimes the bounce happens in under an hour.
That means preparation is key.
How should you prepare? Learn to read Level 2 and use technical analysis. My DVD, “Learn Level 2” is a great place to start. Warning: reading Level 2 on listed stocks isn’t as straightforward as OTCs. With listed stocks, it’s more about technical analysis and reading the chart.
Again, sometimes the panic bounces, and sometimes it doesn’t. Don’t get stubborn. When in doubt, follow rule #1 and get out.
As recently as January and February, the morning panic dip buys came fast and furious. In March, there haven’t been as many good bounces. Morning spikers and supernovas just died.
Remember, you MUST adapt.
Step #6: The Dead Pump Bounce
When I was short biased, this was my favorite time to short sell. Again, when a stock goes supernova, short sellers want to short it. But that can be dangerous because you have no idea how far it can go.
But once the stock has had a cliff dive and a bounce, short selling can be a little more predictable. That said, there’s not as much range. So while it’s easier to find shares to short, you’re not as likely to get a big percent win.
Also … we’ve seen a lot of plays have two or more big spikes recently. Sometimes the bounces have gone right back to highs. Again, I don’t recommend short selling for newbies or anyone trading a small account.
Sometimes there’s no bounce at all. Bounce or not, the next step is…
Step #7: The Long Kiss Goodnight
Don’t think this ends with the penny stock company changing the world with their amazing product…
It doesn’t happen. They’re all junk. And that’s where step #7 happens. It’s a gradual decline over days, weeks, or months. Take a look at the chart above. After the first supernova in early 2019, the stock had a bounce and then a long, gradual decline.
It came back to life in the summer of 2020 and went full supernova again in January 2021.
Top Tips for the 7-Step Pennystocking Framework
Hopefully, you see the similarities and understand the numbers on the charts above. Study these charts. Again, it’s not an exact science.
The overall pattern has variations, as you’ll notice the more you study. But the outcome is the same. So what can you do to better prepare for the opportunities as they play out?
Tip #1: Watch and React
You don’t know if there are greater odds of bouncing or failing. All you can do is watch and react. Never guess. If in doubt or you’re wrong, get out.
Tip #2: Former Runners Can Run Again
Be aware of former runners. Once a stock runs once, it can run again with the right news and volume. The OPTI and SHMP charts above are good examples. And the bubble market this year saw several stocks have a #3 and #4, only to spike even higher for another #3.
Tip #3: Beware of Bag Holders
A company that has been around a while and has gone supernova has bag holders. These traders believed the hype, bought at a stupidly high price, and refused to cut losses. They’ll try to sell into any big spike just to recover losses. So be aware that former supernovas rarely go as high the next time around.
Tip #4: Understand Basic Technical Analysis
Every time a stock breaks a new low or high, it shows up on some trader’s screen. It doesn’t matter if it’s daily, monthly, or yearly. Traders scan for highs and lows. Be aware of the highs and lows in multiple time frames. Learn more about technical analysis here.
Tip #5: The 7-Step Framework Happens in Multiple Time Frames
As strange as it sounds, the pennystocking framework can play out in a day. Check it out…
The VDRM chart above skips the #1 and doesn’t spend much time at #2. It was pretty much a #3 right out of the gate. After that, the framework plays out pretty accurately. Do you see the cliff dive, the dip buys, the dead pump bounces, and the long slow kiss goodnight?
Watch for these patterns as part of the overall pattern. Look for them every day. Especially on big percent gainers.
Top Tip: Understand Bubble Psychology
I saved this for last because it might just be the most important concept for any penny stock trader. The 7-step pennystocking framework is an example of a bubble. Even if it’s for a single stock, the psychology matches that of a bubble.
So it’s key to understand how bubbles work. I encourage every student to read “Extraordinary Popular Delusions and the Madness of Crowds.” Even though it’s 180 years old, it’s still relevant.
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Now take a look at this chart showing the stages of a bubble as applied to a penny stock supernova.
The stock in the chart above doesn’t matter. I could’ve chosen any one of dozens of stocks that followed the 7-step framework (or variations) in the past six months. The point is to understand the psychology behind the different stages in a bubble.
Then learn to apply that to trading the 7-step framework. It’s all about hype, manipulation, greed, and fear.
Notice the different parts of the mania or #3 supernova stage. Learn them inside and out. And note that media attention means social media, too. That’s when social pumps are often at their highest. Some promoters tweet 75–100 times per day about a stock.
Trade Review: Monster OTC Swing by Jack Kellogg
I tell my students to review trades by all the Trading Challenge mentors. So this week I’m reviewing a swing trade by Jack Kellogg. I picked this trade because it’s a perfect example of playing the #1 of the 7-step pennystocking framework.
Jack nailed it*…
American Premium Water Corporation (OTCPK: HIPH)
Again, Jack had a thesis about the marijuana sector (check out some of the details in this TWIST podcast episode). American Premium Water has a range of CBD-infused drinks. It was a bit speculative, but he was meticulous. He made a plan and followed it.
Jack entered the trade on January 11, taking a roughly $14,835 position. Check out the chart below. I’ve circled Jack’s entry and average sell price. (I’m not sure if he scaled out.) I also added the pennystocking framework steps.
As you can see, Jack was in this stock in the ‘smart’ money’ phase. He sold into strength — in the greed phase. Jack took an 893% win on this trade.* That’s crazy!
(*These results are not typical. Individual results will vary. Most traders lose money. Traders like Jack and I have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose. I’ve also hired Jack to help in my education business.)
Notice the first #3 on the chart. The reason that’s a #3 is because the stock spiked 382% that day. Then it spiked another 70% the next morning before slowly fading. For a few days, it traded a relatively wide range for a low-priced stock. But the effect was consolidation. Then it went full supernova again.
Learn From Jack’s Dedication
This was a masterful swing trade and a great example of Jack’s dedication to the 7-step framework.* He’s studied the framework incessantly. While I prefer to play #3 to #5, Jack has learned to look for plays on all the steps. That’s impressive and I think at least partially explains Jack’s amazing success in the last year.*
I recently interviewed Jack about his success. He talked about the 7-step pennystocking framework and its importance to his trading. It’s a must-watch series — be sure to watch all four parts. Start with…
Millionaire Mentor Market Wrap
This post only scratches the surface of my pennystocking framework. It’s enough to begin to recognize the overall pattern. To really learn the framework, you need to study. Here are a few options…
Day 13 of the 30 Day Bootcamp is an overview of the 7-step pennystocking framework. Days 14–19 break it down to the patterns within the pattern. If you’re just getting started, the 30-Day Bootcamp is a must-have resource.
This guide explains the 7-step framework in detail. Note: “Pennystocking Framework” is a bonus when you get the 30-Day Bootcamp.
Pennystocking Framework Part Deux
This guide provides a history of the 7-step pennystocking framework and updates it. “Pennystocking Framework Part Deux” also has examples of live trades using the 7-step framework.
What do you think of the 7-step pennystocking framework? Comment below, I love to hear from all my readers!