Chapter Nine: My Penny Stock Chart Patterns

The supernova is—above and beyond—my favorite chart pattern to play.

Basically, this is an explosion in stock price that creates many different opportunities to buy on the way up and short sell on the way down before fading into oblivion over several weeks or months. It’s named after supernovas in space and it’s pretty much the same thing, except that you’re dealing with stock prices.

The Symptoms: Supernovas can be triggered by anything, including newsletter mentions, world events, message board hype, and company news. But it doesn’t matter what causes them. All you’re looking for is the possibility that the supernova will occur, and then you can trade based on the pattern.

The Treatment: These stocks experience massive volatility and liquidity, so it’s easy to buy and short sell shares. That’s why this is one of my all-time favorite chart pattern to trade. Sometimes these stocks triple, sometimes they quintuple—sometimes they go up ten times. The point is that they explode, and nobody knows why. All I know is that it’s a great opportunity to profit.

YTB International | YTBLQ

YTBLQ is a pink sheet stock. Normally, I don’t like to play pink sheets, but when you see a chart pattern like this, it’s just amazing. Just look at it—it’s a perfect supernova. All throughout the beginning of the year, the stock was gradually up trending from $3 dollars to $4 dollars to $5 dollars to $8 dollars, with lots of little tiny up days before just goes supernova.

There’s not much financial information about this company and nobody really knows much about them, but take a look at this gradual trending. Gradual trending is a great signal that a stock could explode because everyone thinks, “Oh, this stock went from $2 dollars to $8 dollars—it’s probably going to go back down.” But that’s not the case.

The momentum lasts longer than you think possible and towards the end, when the supernova really occurs, the stock prices go up exponentially. You see that within 3 days, the stock goes from $10 dollars to $17 dollars and it hits $18 dollars intraday. At $17 dollars a share, this is a $500 million dollar company that basically has almost no revenues and no profits. But it doesn’t matter! That’s pretty incredible to me.

Then, you see the big drop-off. In this case, a negative report was issued by an independent newsletter questioning the company’s valuation. They were right to question the valuation, but it doesn’t matter—what matters is that the stock has gone from $4 dollars to $18 dollars in about 2 weeks and it’s ready for a fall.

Again, stop-losses were a big factor here. A lot of people who bought in at $4-10 dollars a share put in stop-losses at $15 dollars a share saying, “Ok, I’ll protect myself by automatically selling out when the stock hits $15 dollars.” So when these stop-losses fire, you have a massive wave of selling and you can see that within 1 day, the stock went from $18 dollars all the way down to $10 dollars within a few hours. There are no bounces.

A lot of people might look at this and say, “Oh, it dropped from $18 dollars to $10 dollars—let me play for the bounce.” NO. You don’t try and play supernovas for a bounce. This is a pure pendulum of momentum—straight up and straight down. There might be bounces when it goes down too quickly, as in the case of mid-February when it dropped from $10 all the way down to $5 dollars a share and bounced all the way back up to $12 dollars. A bounce from $5 dollars to $10 dollars is nice, but it’s very scary because you can see that, a month later, it’s down further to $4 dollars.

The way to play this is to wait for the drop. Unfortunately, when the stock is dropping so quickly, it can be difficult to short sell if you can’t find the shares you need. But if you can, short the stock after it cracks when the momentum is over and there’s lots of downside potential. Each supernova is different, so study this chart and any other supernova charts you can find. The more experience you have with this pattern, the more profitable you’ll be as a trader.

Broadvision, Inc. | BVSN

This isn’t a pink sheet company—it’s a NASDAQ bulletin board player—but once again, there’s no news whatsoever and people are mystified about why the company is rising so quickly. And I have to tell you, I don’t know. I’ve been doing this for a long time and there’s no rational explanation—all you know is that this pattern exists and you can see in this example from January to March. There are lots of little up days going from $0.50 or $1 dollar a share, and the volume is nice, with a few thousand shares here a few hundred thousand shares there. But it’s in mid-March that this one really blows up into a supernova, going from $2.50 to $4.50 over the course of 5 days.

Now, I’m not trying to predict a $2 dollar price move—that’s why I say to take your solid profits when you can get them. But when a stock starts to go exponential like this, buy it at $3 dollars and sell it the same day at $3.30, or buy it the next day at $3.50 and sell it at $3.90. It’s very dangerous to hold these stocks over night because, as you can see, when it touched $4.50, the next day it dropped from $4.25 all the way down to $3 dollars. So while that would be a very good time to short, it can be difficult to time these plays correctly.

The good news here is you see the 3 big up days and the 1 big down day and then 3 more up days, which is a nice little rebound. That rebound is a nice time to short because you know that the rebound can’t last forever. It’s like a dead cat bounce.

Obviously, after those three tiny up days when it goes from $3 dollars to $3.75, it has 4 big down days from $3.50 down to $2.50. Personally, I’d want to short the stock from $3.50 to $2.50, when the volume has dropped off. You could take a position at 10,000 shares and short it at $3.50 or $3.30—whatever—and cover at $2.75. Don’t try to get it at the exact top or the exact bottom—just ride out the key point of the momentum.

The key to this stock was playing it all through March, when you had 3 big up days, 1 big down day, 3 little up days, and 4 big down days. I know it gets complicated, but during those momentum shifts, you can predict what’s going to happen with relatively good accuracy.

ERF Wireless, Inc. | ERFW

Again, the company doesn’t really matter. This is a bulletin board stock, and you can see from its chart that it doesn’t really do anything from March through July. I’m not interested in this stock until July, when you start to see lots of tiny little gains. It’s growing from $0.40 a share to $0.70 a share, which earns it a spot on my watch list.

When you create a watch list, you’re looking for the stocks that are the biggest percentage gainers or losers. There are so many different screening tools out there, but the key is that you’re just looking for stocks that are moving.

Again, this is a tiny stock. When it was sitting at $0.60 a share, the company started announcing some networking deals that made headlines, kicking off the stock’s exponential growth. That’s when you really have to start looking to play. You can buy a little on the way up, but again, if you know supernovas like I do, the key to making money is short selling.

In this case, you wait for the run-up and you see that it goes from $0.70 to $1.40 within 2-3 days, and the volume gets up to 2 million shares. At that point, the company announced a few more deals, but you can see that the trend obviously changes and it goes straight down from $1.40.

Again just try to pick the top after it cracks. Short it the first down day after the 3 up days, between $1.30 and $1.10. The next day, you have a little bounce, but as long as you keep your stop-losses (at $1.40 in case the stock moves higher), you’ll be protected. Within 2 days, if you shorted the stock at $1.30 or $1.20—or even $1.10—it was down to $1.0 or $0.90.

As you can see, this isn’t a big gainer, but a nice little $0.20 move on a $1 dollar stock is pretty nice. I don’t like to short stocks under a dollar, but when a stock moves up from $0.30 to $1.50—a nice little quintuple within 2 weeks—I want to short some shares. With the stock trading at a volume of about 1 million shares a day, you could short maybe 10,000 shares.

Remember, the goal is just to make a few thousand dollars at a time—lots of small profits add up. Trust me, this is how I made my money. So if you short it at $1.30, $1.20 or $1.10 and cover at $0.90 or $0.80, you’re making $0.20—$0.30 a share, and on 10,000 shares, that’s $1,000 dollars or $2,000 dollars. That’s a pretty good return for just a few days’ work. If you have the patience to hold a few more days, it’s dropped even more, but I’d much rather take the sure profits and get out while I can.

Earth Biofuels, Inc. | EBOF

Now, this is a nice supernova for you to know about. It’s an alternative energy play. Alternative energy has been hot over the last few years and guess what? It shows in this stock’s performance!

Look at the left hand side of the chart. This isn’t rocket science. You see a gradually up trending stock chart that’s going from $1 dollar to $3 dollars. It doesn’t look very gradual when it’s happening, but if you look closely, you’ll notice that don’t see any big 1 day moves. The big mover is at the end of April. The 1 big white bar where it goes from basically $2.60 to $3 dollars in one day is the breakout.

You can see that it didn’t break $3 dollars all throughout March and the beginning of April, but $3 dollars is still a massive breakout—it just can’t get any easier than that. As a result, you see massive buying—over a million shares buying—of people who are buying it at $3 dollars and holding it for a few days before selling it at $3.50, $4.00, or $4.50. Personally, I wouldn’t have had the patience to wait for the huge supernova, because again, you never know when it’s going to go exponential.

You can see the same pattern again where you have 3 big up days in the beginning of May and the stock moves from $4.50 all the way up to $7 dollars. The problem with this one is that you could have actually shorted this nicely at $7 dollars, but there just weren’t that many shares. Trust me—I tried. I shorted something like 5,000 shares at around $6.50 on the way and covered at $5.50 the next day. I probably probably should have waited two weeks, but again, I’m not trying to be perfect—I’m just trying to take the profits.

At $7 dollars a share, the company announced that it was offering financing at $0.50 a share. Talk about desperation—$0.50 a share when the stock is trading at $7 dollars. Obviously, those people were pretty happy and they sold their shares as quickly as they could. After that, the stock gets pretty boring and messy, but for a while there, it was a great supernova to get to play.

Hoku Scientific | HOKUQ

Okay, I just have one last supernova I want to show you. Believe me, I’d show you dozens more if I could. Every supernova is different, so you can learn a lot by looking at as many of them as you can find. I could keep going all day, but if I did, this guide would turn into 200+ pages.

Hoku Scientific is a higher-priced stock with higher volume—this one is just crazy. Look at that first big up day in mid-June on the left hand side of the chart. The stock isn’t really doing anything, but it was on my watchlist because at the time, it was listed on the NASDAQ and trading between $5 and $10. That’s kind of my sweet spot, but where I get really interested in this stock is that first up day when it goes from $5 dollars to basically $7 dollars or $8 dollars in one day.

As you might have guessed, a large deal was announced, which bumped it to the top of my list, because then it was a potential supernova. It was hanging around $7 dollars for a few days, but look at that big black day with volumes reaching 25,000,000 shares—it goes all the way up to $10 dollars in one day. The best place to buy would have been right where it breaks out of that previous high of $8 dollars per share. Buy it at $8.10, $8.20 or even $8.30 because it only took a few hours to go from there all the way up to $10 dollars on its massive breakout.

What’s happening is that all those short sellers who thought that the stock price was going lower are getting squeezed—they have to buy the stock and the momentum pushes it higher. In a few days, it goes all the way up to $12 dollars, but then it starts getting messy (and as you learned in an earlier chapter, I don’t like to trade when things get messy). It keeps going up to $14 dollars, but again, it’s not predictable. The intraday keeps going back and forth, and it’s actually a nice short sell afterwards, but I don’t want to touch it.

The way to play this one was actually to buy on the breakout. Short selling this one is just too messy. There are some stocks you can buy and then short, some stocks you just buy, and some stocks you just short sell. You have to really understand when it’s a clean looking chart and when it’s messy. Then, when you see that it’s messy, you know to just ignore it.

(PS—In case you haven’t noticed, I love supernova charts! I’ve got a ton more to show you in the insider’s area of my millionaire trader challenge. Join us inside to see more!)

So, here’s another one of my chart patterns—the “stair stepper.”

This isn’t scary stuff—it’s just a stock that gradually rises and falls in price, and whose chart pattern resembles a staircase going up or down.

The Symptoms: The stock rises and falls sharply, followed by prolonged sideways price action. It’s exactly like a staircase. The pattern becomes a self-fulfilling prophecy as traders look to profit buying into each staircase step up and short selling into each stair down.

The Treatment: Gains are possible, but be very wary when the staircase becomes too steep either way, as the pattern can quickly reverse.

Tower Tech Holdings | TWRT

Not all stair-steppers are perfect, but this one is pretty close. You have the basic beginnings of a stair-step, but nothing really happens until March. At that point, the company announced a $15 million dollar financing, which led people to buy the stock, as they thought the financing would really help the company. Again, you’re not trying to decide whether the financing is a positive or negative for the company—you just have to let the stock price decide.

When the company’s news was announced, it was trading at $2.50 a share. Personally, I wouldn’t buy there, because you don’t know if the news is going to be positive or negative for the company until after a few days. What you do is buy the next stair-step up when it breaks $3.75 and goes straight to $4.10 in one day at the end of March.

The stair-stepper isn’t nearly as fun as the supernova. You’ve got one big up day and then you have a month and a half of sideways action before it falls, out of the blue, with no volume in late May. There’s another stair-step from $3.50 to $4.50, followed by another little stair-step down, and then you have another blip up in July from $4.25 to $5.50. It’s very tough to make money on this kind of thing, but it is a pattern you’ll see from time to time.

Strata Oil & Gas Inc. | SOIGF

This was one of my favorite plays a while back—I made a ton of money just riding this staircase. It’s a messy staircase, but it has moments of clarity. As you can see, it’s pretty much doing nothing in March, but in April, things start to get interesting. You see the volume increases, the price increases, and—sure enough—that’s when I got about 100 messages through all my newsletter subscriptions saying, “Buy this stock—this stock is the next EXON.”

That got a lot of people excited and it was up every single day, but as you can see, most of those gains in April were only $0.10 or $0.20, so it’s really not enough to really interest me until the end of May, when I really got about 400 newsletters promoting this stock. Somebody spent a lot of money—whether it was the company themselves or one of the shareholders they disclaim it at the bottom of each newsletter—trying to hype up this stock.

And, as you can see, it worked, as the stock went from $3 dollars all the way up to $6 dollars a share in a few days. If you bought intraday, it was very nice, as every single morning it went up and that’s a great time to be buying. You don’t want to be short selling into these newsletters, because you never know when more newsletters are going to be sent out and when more people are going to be buying in.

The real time to short was in the beginning of July—obviously, in July, the stock cracked big time. But the key to it was that it tried to break out, and it did make a new high all the way up to $8 dollars a share, but in the first few days of July, the momentum faded and for a few days, it really couldn’t do anything. When a chart like this refuses to break out to new highs, people are going to get concerned—and when people get concerned, they turn into sellers. After enough sellers are created, you have stop-losses getting taken out and you have a free fall—which is what happened in mid-July when the price dropped from $7.50 to $4.50.

As you can see, it’s very clean—there are no up days in the middle of that week-long drought, and I can tell you the intraday pattern every single day was gradually lower. Again, $7.50 to $4.50 is a nice 3-point drop, although I’m not saying you should ride your short for 3 points.

But if you see a stock like this dropping that was sitting at $1.50 just 2 months ago, you know that it’s got room to go down a lot because nothing substantial has happened—it’s all just newsletter mentions. So if you short this stock at $7 dollars or $6.50 and you cover at maybe $6 dollars or $5.50 right in the center of the whole thing, you’re going to protect yourself since you don’t know how long it’s going to drop.

In this case it dropped to $4.50, but again, you can’t predict that. The rest of the chart is irrelevant all the way up until December, because you can see that in October and November, it wouldn’t crack $4 dollars a share. Obviously, $4 dollars was some kind of major support until you see one day in early December, it cracked $4 dollars. It was just a slight crack to $3.90 or $3.85, but it’s important because it cracked support at $4 dollars and that takes the momentum away from the buyers.

Remember, this stock came up from $1 dollar, so even at $4 dollars, it still quadrupled and the company has had no major announcements since. Apparently, it didn’t turn into “the next EXON.” Short it anywhere after it cracks $4 dollars and you’re golden all the way down to $1.50. Again, don’t try to short it from $4 dollars all the way down to $1.50—that’s too big of a percentage drop. But if you short it anywhere from $4 dollars to $3.50 and cover anywhere from $3 dollars to $2.50, that’s some solid profits.

Calpine Corp. | CPNLQ

Here’s another stair stepper—Calpine Corp. The company used to be a big energy player like Enron, but it went through some hard times (the Q at the end of the symbol means that they’re actually in bankruptcy so they’re traded on the pink sheets). The stock was all the way down to a dollar on the left hand side of the chart, but look from December through March and you’ll see that you’ve got this gradually up-trending chart.

You can make the case that it’s a small stair-stepper, because obviously, you don’t know that it’s going to go to $4 dollars in a few months. In fact, this is almost a supernova because you see the breakout at the beginning of April. The first few days of April, you have nothing but 4 straight up days, where before, it could never break $2.25.

So say you buy it at $2.25 and sell it the next day at $2.50, and then you see it has one red day before 2 big black bars signaling that it’s higher. Before it goes to about $2.70, you buy it right when it breaks the high—maybe $2.75 or $2.80—as long as you make sure that it breaks. Otherwise, you’re risking that it’s at the top and you’re going to get screwed, so you buy it on the breakout and it goes straight to $3.25.

Again, this stock is one that I wouldn’t necessarily play, since I don’t usually like lower-priced plays with so little upside. But remember that it some stocks fall $3 dollars in a few days—and this one is barely trading at $3 dollars to begin with. Keep things in proportion and make the plays that make sense for your portfolio size and risk tolerance.

Here’s another chart pattern of mine that I call, “the snore.” It’s boring—just like most penny stocks are. They have very little liquidity, and there’s no discernable pattern. Don’t play these—just know what they are so that you can avoid them.

The Symptoms: Prolonged boredom, demonstrated by a lack of stock price movement—even in light of surprisingly noteworthy news. In a lot of these cases, investors try to convince themselves that it’s just a matter of time before the stock is discovered and that only then will they consider selling.

The Treatment: Watch these snoozers, but don’t trade them until they show signs that they’re in play. A lot of these stocks are boring for a while, but then, a few of them show some volatility and liquidity. Most penny stocks like this never see any action, though, so they’re irrelevant for what we’re trying to do.

Ivanhoe Energy | IVAN

As you can see from this chart, it’s not always a snore, but most of the time it is. Back in the beginning of the year, it had a big run-up from $1 dollars to $3 dollars. That’s a nice move, but I wouldn’t have shorted it because the news that propelled that was a successful technology test. If you do this for a while and see enough of these moves, you start to learn what kind of news is actually important.

In my experience, you don’t short successful technology test—even if the stock quintuples —because you’re trying to game the odds that a company won’t be successful. When you have a successful technology test, the odds just went way up. Even if, 9 months down the line, the stock goes right back down, you can’t predict that it won’t turn into a $10 dollar or $20 dollar stock.

Never short into successful technology tests, never short into FDA approvals, and never short into good earnings. Yes, you should short into newsletter mentions and message board hype, but you have to be able to tell which hype is real and which is not. In this case, after the company’s successful technology test, the stock did nothing—it’s very messy. It goes from $1.25 and $3 dollars and it goes up and down, but there’s really no discernable pattern. It’s a snoozer. Goodbye.

Satyam Infoway ltd. | SIFY

Interestingly, this is a company I traded a lot, back when it was a supernova. Remember that companies can change in and out between chart patterns—they can be snores one year and supernovas the next. The key is to focus on them when they’re in play and when their charts are interesting, because although we can analyze these companies all we want, the companies don’t change—the charts do. That’s why I say it’s all in the charts.

For pretty much the entire year, the stock gyrates between $8 dollars and $10 dollars. That’s the most boring thing I’ve ever seen, especially given the number of different trend changes you see here. There are over a dozen trend changes between $8 dollars and $10 dollars. Are you kidding me? I’ve never been so bored in my life!

You can see a spike in July when the stock surged after the company signed a deal with Microsoft, but then nothing happened. Similarly, that big drop later in the month happened when they reported earnings (which didn’t yet account for the Microsoft contract). I try not to judge whether earnings are good or bad—I let the stock do the talking. And, as you can see, the stock dropped off from $9 dollars to basically $7 dollars in a few weeks. It turns out, people didn’t like the earnings.

There’s really no good time to play this stock. You wouldn’t ever want to short into a Microsoft deal, as that could have been huge. You can’t predict the company’s earnings, so you just want to ignore it.

Internet Initiative Japan | IIJI

As you’ll see, I also made a lot of money on this, back before it got really boring. Whe whole left hand side of the chart, as you can see, is very messy. It’s the same thing as the SIFY chart that got stuck between $8 dollars and $10 dollars. There were lots of different trend changes because they reported earnings twice, but it doesn’t matter—I’m not going to even tell you when they reported earnings. If the chart was interesting, I’d tell you what their earnings were, but who cares? There’s nothing much going on here.

Back in July, you can see a little pop up from $8.50 to $9 dollars that happened because an analyst upgraded the stock. If you didn’t know trading, you’d probably think that the stock should go up, but in the 3 weeks after the analyst’s upgrade, the stock goes from $9 dollars to $7 dollars. This is just classic Wall Street, where a guy probably upgrades the stock for what he thought were great business reasons—but he wasn’t listening to the snore! It’s boring and then the stock dropped, there’s no discernable trend. Get rid of it.

The last one of my chart patterns that I want to cover here is called “the crow.” This is a stock that gradually sinks lower and lower in price, picking away at your investment like a crow picking at a carcass. You don’t want to be invested in a crow because all of your earnings will be picked away.

The Symptoms: Prolonged bouts of continued selling pressure and brief spurts of price strength met with even heavier pressure. Often this happens if somebody doesn’t believe in the company and/or receives shares at lower prices, prompting an indefinite sell. If you see continued selling, something is wrong. Don’t buy these companies.

The Treatment: So what do you do? You short sell a stock like this if you can find the shares. I’m not a long-term short seller, but if you see a chart like this, try and short a little—maybe 500 shares—and see what happens. Be aware of illiquidity and short squeezes, though, because even though these stocks are gradually sinking lower, there are still brief spurts of activity. But I can’t emphasize this enough, never hold a long position in a crow. It will just pick away at you!

Platinum Research Organization Inc | PLRO

PLRO used to be a great-performing supernova, but what happened was that somebody lost money on this and had to sell their shares. In March, the company reported earnings right when the stock was at $2 dollars, and you can see that right after that, prices dropped from $2 dollars to $1.25. I don’t know whether the earnings were good or not, but it doesn’t really matter. Somebody thought that they knew every single thing about the company, but then the stock’s price action didn’t match their expectations and the price suffered, leading to regular sell-offs.

As you can see, from April to July, the stock’s price just gradually sank lower and lower, even though the company put out dozens of positive press releases talking about how great they were doing. None of that mattered, because there were still too many sellers trying to get out.

Learn from these patterns. It doesn’t matter how good a company is. They could be the best company in the world, but if their stock chart doesn’t show it, it won’t attract buyers—especially in the case of penny stocks. There’s always something hidden, and you can’t know all the variables. Be cynical, and until the stock proves that it can turn into a supernova or something, assume that it’s going to be the crow and you’ll save yourself a lot of money.

Source Petroleum Inc. | SOPOE

Here’s another crow for you to learn from… The “E” at the end of the ticker symbol means that the company had a late SEC filing and aren’t in compliance with SEC policies, so they get demoted with an “E” at the end. Watch out for that as you research penny stocks in the future.

SOPOE is actually a stair-stepper crow because you can see that it moves very gradually in stair-steps before the company reported earnings in mid-December. At this point, the stock dropped from $1.80 down to $1.20—obviously, the drop was related to the company’s earnings. It’s not for me to judge, but looking at the stock price, the earnings weren’t very good.

Again, they reported earnings in April after a little bump-up to $1.40 and right after doing so, the price dropped from $1.40 down to $1 dollar (clearly, somebody didn’t like their earnings…). They reported earnings again in late May at $0.80 and the stock dropped to $0.70, but by then, it’s not as volatile and you’ve got this seriously messy stock chart.

Don’t try and short these companies, because this is a dollar stock. As bad as the stock chart is, it could easily pop to $3 dollars or $5 dollars any single day. Better to stay away from this crow and let others risk losing their capital.

Net [email protected], Inc. | NTBK

Here’s a perfect crow to look at. NTBK used to be one of the high fliers of 2000 and 2001—they were going to revolutionize internet banking, and now they trade on the pink sheets. Obviously, they didn’t revolutionize internet banking, and they’ve suffered big, as you can see from this stock chart.

In November, they reported pretty bad earnings. That’s not my call to make, but judging by the stock’s price action, they were bad. The stock was at $5.50 when they reported earnings, and then there’s just this continual descent. The big crack really happened in March, when they reported earnings and the stock cracked $3.50. Clearly, that was a pretty bad earnings report, as you can see that, within a month, it dropped to $1.50.

That big drop could have been a good time to short sell some of this stock, but understand that you could get into a short squeeze situation. The big drop occurred in late May after the company sold off a division for a big loss—basically, they took a division that they had paid $60 or $70 million dollars and sold it off for $2.5 million. They were bleeding cash, and people lost confidence. The stock traded at $0.10 a share for a while before it was eventually delisted. Stay away from situations like this.