The Framework Of An Afternoon Fade And Why It’s So Essential To Short Selling Penny Stocks
I was on Twitter for a second yesterday and a came across an interesting tweet from Timothy Sykes……
When shorting penny stocks, it’s so key to wait for these afternoon fades and ideally the taking out of the morning lows, remember this!
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An afternoon fade is one of a penny stock trader’s best friends when short selling penny stocks. It is one of my favorite short selling patterns because it’s VERY predictable.
So lets get to the basics: What is an afternoon fade? An afternoon fade is when a penny stock gradually (sometimes sharply) comes down off its highs of the day and keeps making lower lows for the day. Keep in mind we’re only looking for afternoon fades in penny stocks that are hyped, manipulated to 75%-300% gains in 1-10 trading days.
What happens is during the morning hours of trading there’s a ton a volume and volatility in these types of penny stocks because of news, hype, promoting, message board pumping, etc. Then what happens is by the afternoon time everything kind of calms down from the morning spikes and all that craziness and these particular penny stocks start trending gradually downwards because the momentum drains out and volume is lighter from that in the morning. A key to spotting an afternoon fade is when your targeted hyped penny stock begins to make intraday lower-lows OR goes below the morning lows – during the afternoon. Here’s a chart diagram that shows a picture perfect afternoon fade (from yesterday actually).
Afternoon fades are very predictable pattern to short because there usually just isn’t enough volume to turn up a penny stock turning downwards..traders just kind of go with the flow. Because of this its less risky because of the non-volatile factor. For you beginners just getting into or wanting to get into shorting penny stocks, I suggest you try to short these types of patterns first because it’s less risky. Then once you get your feet wet you can began to short this amazing pattern.
A Penny Stock’s Short Interest: What It Tells You
Short interest is the total number of shares of a particular penny stock that have been sold short by traders but have not yet been closed out or “covered”.
Short interest is calculated by dividing the number of shorted shares by the number of shares outstanding (all available shares offered), or alternatively you can just go to ShortSqueeze.com and they give the information to you automatically when you input a certain penny stock’s symbol. Short interest is only calculated twice a month in stocks, not everyday, so keep that in mind.
If you go to ShortSqueeze.com you’ll see what’s called “days-to-cover” which means that’s the estimated time it would take to cover all shares that are short in the penny stock.
Here’s The Point: The higher the days-to-cover aka short interest ratio, the more likely they’ll be a short squeeze!
So knowing this, how does it help you? Well, whenever I mention a penny stock is setting up to short, and you DO in fact open up a short position in it…you should check the short interest of that penny stock to see the possibility/magnitude of a short squeeze.
Here’s another point to consider: Say there has been a huge manipulated/hyped run of a penny stock that we all know is a scam company…every pennystocker out there is just waiting to short this thing at the right moment. Then that moment happens but now theres so much shares short (because of it’s popularity) that every trader now is vulnerable to a short squeeze.
If you’ve read this post and still don’t exactly know the whole deal behind a short squeeze, get my FREE eBook, cause I explain everything about the short squeeze.
The lesson here is to always consider the short-biased popularity on a given penny stock because the more shares short the more you’re at risk for a squeeze. Don’t get juiced!
Two Penny Stocks That Made Me $550+ In Two Days
Monday and Tuesday of this week proved to be solid trading days for my portfolio. Over the weekend reports that the swine flu in Mexico caused huuuuge hype in the markets, particular all the swine flu penny stocks. I knew going into the Monday’s trading day that I wanted to buy one of these speculative penny stock plays after seeing how they’ve reacted in the past, but I wasn’t willing to buy one at the pre-market prices, as most of the penny stocks in the biotech sector were up 80%,90%,100%+.
So I brought up my watch list of potential swine flu penny stocks and thought of my game plan. It was pretty simple: I figured that I would buy the penny stock that was up the least amount of % in the watch list. Make’s sense right? Well the lucky winner was penny stock NNVC.OB. To make things even better, this company released a PR that same morning that specifically mentioned “swine flu” in it. Now there was 2 important reasons why I knew this stock could really potentially make me some money.
1) This stock was only up 30% pre-market according to the bid/ask (remember penny stocks trading on the OTCBB exchange don’t have pre-market buying/selling BUT they do print the bid/ask before the market opens –effectively the same thing except no shares are actually trading hands during this time). Other penny stocks were up over 100%+, so I figured that NNVC definitely had room to run especially considering it was already way behind compared to other penny stocks in its sector.
2) The PR they released that morning before the market open specifically mentioned “Swine Flu” in it. Now this was huge because none of the Biotech swine flu stocks, even those that were up 100%+, had a PR that mentioned “swine flu”.
As the market opened I put in my order for 3350 shares @ 1.04. I immediately got 1800 shares filled but then this thing took off skipping over the rest of my shares. Unfortunately I got the rest of my shares filled at 1.12 thus giving me an average of 3350 shares at 1.08. You gotta be quick!
Ended up going to 1.25 before some profit taking took place, causing it to drop down…then seeing that the other biotech penny stocks were dropping I got scared and sold my shares at 1.18. Shoulda sold some at 1.25 as I was too greedy and wanted more, but on the same token I’m glad I got scared and sold at 1.18 because you can see in the chart below where it closed..Solid $335 profit, though.
Now lets head on to yesterday (Tuesday) when in my premarket watchlist I said that DDRX was my top potential short. This penny stock opened up green but stalled for the first 10 minutes of the open. I knew that it might be the turning point for this sucker to go red on the day. Sure enough 5 minutes later the stock went into negative aka showed the weakness I wanted for this to make it a great short. I have never seen a penny stock drop so fast, I literally went to my brokerage to enter the short order and this thing had already dropped 7%. I finally got my order filled for 476 shares short @ 7.34. Wounded up going down to 7.00 in the next 5 minutes but I wanted more. At this point it was just going to be toughing out a short squeeze that I figured wouldn’t go too far considering the stock was now on our side (the short seller’s). I went to math class around 2 to take a test, that I think I made a 100 on, wooohoooo! Came back and planned on selling this sucker by the close because I just didn’t like the spread between the bid/ask and the sideways price action all coupled around the fact that this was a earnings play that may not give me fast negative move like I want. I wound up covering my shares at 3.85 for a cool $227 off of a perfect green-to-red move that I fully detail in my FREE eBook. I really think this penny stock would be a good hold for a week or two because of the total unsustainable run up this penny stock has gotten. But the patience that I have (An 18 year old) just isn’t there yet!
A Chart Pattern That Will Make You Money Shorting Penny Stocks
Over Tues, Wednesday penny stock FRZ exhibited everything a potential short should: A quick surge up of over 100% in a span of two days all while having no news — a clear sign that this was a pump by a promoter (You can get a list of the top penny stock promoters here!). Knowing it was a pump, everyone knew there would be a dump. This is when your ability to read charts comes into play because charts will tell you EXACTLY when to short.
Well, FRZ developed a pattern on the 5-min chart that is known as a Triple Top Revsersal and it is one of the most predictable patterns to short. 9 times outta 10 the penny stock will tank when this pattern develops. The pattern sets up when a penny stock makes 3 equal(or close to equal) highs which is followed by a break in support. Pretty simple to understand, right? Here’s an illustration of FRZ yesterday (too bad I was in class and couldn’t short it) — YET another reason trading penny stocks is better than class! That’d be a good topic to blog about wouldn’t it?
This really is one of the best patterns for shorting penny stocks, and for good reason cause it works! The pattern is just like the Double Top explained in my FREE eBook, but instead of forming 2 “tops” i.e equal(or close to equal) highs, it forms 3. Consider this: The more a penny stock bounces off a specfic price point the more significant that price point becomes. Which is why the Triple Top Reversal is soooo much better than the Double Top, and more reliable..not to mention predictable…. and that’s all we want down here in the “gutter”
I’m planning on doing a whole series of charting 101 stuff, including how I set up my charts and more chart patterns, etc. in the next few weeks let me know if thats a good idea.
Response To A Reader’s Question: Pattern-Day Trading Rule
Hi Justin! listen I have one question about SogoTrade. You said something about limited amount of trades per week or did I misunderstand? how many stocks can I trade per day/per week?
Yes, If you’re a poor penny stock trader (like me!) trading with less than $25,000 then there are limits to your day-trading. This is not limited to SogoTrade, though, because every single brokerage out there has to follow the same rules…you can thank the SEC for their make-no-sense rule. Now a pattern day trader is one who makes 4 daytrades in 5 days…if you do that you are required to have $25,000 in your account. You CAN daytrade 3 times in 5 days if you have less than $25,000 BUT ONLY if you have a margin account.
You see me daytrading because even though I’m poor, I do have a margin account, therefore I can daytrade only 3 days a week. I haven’t yet used up my daytrades in a week since starting the blog, but I’m sure I will…and you’ll know cause I’ll complain and complain. Afterall if I really wanted to I could daytrade 3 times in one day..but that’s not smart considering I wouldn’t be able to trade for another week.
Plus if you want to follow the strategy outlined in my FREE eBook you’ll have to have a margin account. All you penny stocker’s with a cash account get NO daytrades whatsoever AND you can’t short penny stocks, or any stock for that matter.
If you have any questions, comment down ↓ there and I’ll answer them.