Good morning all. We're seeing a little back and fill off yesterday's move up in the major indexes. I personally just bought some May 19 QQQ Call Options to play some potential short-term follow through to the upside in the major indexes. Fairly risky... so we'll see. However, I don't plan to hold them long. Like we mentioned yesterday, although this market is due to bounce, there still exists the possibility that the market could take out the double bottom put in over the last few days but again, if it does, I believe the NDX is still within about a 40 point range of finding at least a short-term base to support a decent move to the upside.
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So whether we rally from here or we move a bit lower, we think this market is in a position to move higher very soon. We believe the monthly and weekly charts of the major indexes are still intact with a bullish bias and there's even the possibility that the markets may enter a range bound scenario which would make current levels very attractive.
Just so you're aware, we usually open our daily newsletter with our view and opinions of the major markets because that's the backdrop for everything else. Although the major markets definitely do not determine whether or not an individual stock is going to go up or down, they do provide opportunities to play short-term moves for excellent profits and also provides the all-important undercurrent for most issues.
Enough of the major markets for now. Ha. We got what we believe to be some very valuable opinions and analysis for you today on the subject of penny stocks.
Not All Pennies are the Same - Part 1
Since so many of our readers are very active penny stock players, we thought we'd provide you today with a few important tips on how we identify and play hot penny stock plays. It's important for me to note that our commentary today is based on more of a trading mentality as opposed to an investing mentality because, like we've said so many times before, you have to know who you are when you're going to put your money to work in the markets.
Long-term investors buy into the fundamentals or future growth prospects of a Company whereas short-term players tend to rely more on technicals rather than fundamentals. There's plenty of opportunity for both and usually more often than not slow and steady investing often wins the race, unless you're good at spotting short-term opportunities faster than the next guy.
Ever gotten a "Special Report", a hot penny stock tip from a friend or an email from a penny stock site promising a double or even a triple on XYZ penny stock? Now don't get me wrong here, I'm not suggesting those aren't good sources for ideas because they often can be as long as you understand what's going on and are willing to put in even just a little time to analyze the situation.
I could probably write a book on the topic but in the best interest of your attention and time, I'm going to cover what I believe to be few of the most important points here and continue with this ongoing editorial in our newsletter from time-to-time. We're also going to start providing our opinions on other popular penny stocks (not just our featured ones) to help you navigate your way to more profits.
The first and most important aspects of playing a potentially hot penny stock is knowing what you're looking for regardless of what anyone is telling you and to identify the opportunity earlier than most everyone else. How do you do this? There are a number of different opportunities that penny stocks present, so here's a few good ones I've learned over the years.
One angle I typically look for is a penny stock that has been sleeping on much less than desirable volume and moving sideways for a period of time that all of a sudden starts getting volume spikes with very little movement in the stock. Then, you start seeing the stock move up very gradually on either an equal amount of volume or more. This usually tends to happen over a very short amount of time. Either there's a promotional campaign coming on the stock or for one reason or another is starting to attract organic interest.
It's important you know that no penny stock just all of a sudden attracts a lot of interest for no particular interest. There's ALWAYS a reason... the least of which is because the Company simply exists.
The whole key here is to find an entry that presents good risk/reward that allows you to position yourself with minimal risk. Once I've identified the opportunity, I'm going to jump in ASAP and set a stop loss I'm comfortable with. I then am going to make sure that the stock starts behaving the way I anticipate it will. As long as the stock is cooperating to what I originally thought was going to happen, I'll stay with it setting trailing stops on the way up.
With this particular angle, you've got to be in early. If you think you're going to jump into a penny stock that has been rocking for a month, there's a good chance you're going to be left holding the bag.
One of our other favorite angles is actually very contrary to the first. Basically, the penny stock world lives and breathes on extremes. Just like any other opportunity to make fast money, it doesn't come without its risk. You'll hear us say one of the best times to buy a penny stock is when nobody cares. Maybe the stock has been promoted till the cows come home or the stock has recently had its brains blown out on huge volume and now everyone's sour.
This often provides an opportunity for a savvy penny stock player to play a very tradable bounce. Just like when the major indexes fall to a point of maximum pessimism on maximum volume, that often ends up being a bottom in hindsight. The key here is the stock has to be taking out a new low on huge volume which suggests that capitulation and potential turning point for the better. Stocks love to rally once everyone has thrown in the towel and that's no excpetion for penny stocks.
I'll leave you today with one more thought on the topic. Whatever you do, unless the penny stock in reference has proved its model and the fundamentals are improving, don't get married to the idea. The penny stock world is littered with speculation and development stage ideas that have yet to prove their worthiness for long-term investing. However, companies can and often do go from development stage to proof of concept fairly quickly. You just have to be paying attention to the news and more importantly their quarterly and annual financial filings with the SEC.
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If you don't know how to read a financial statement, then basically you should never marry a penny stock. Just play them with a short leash and don't be too greedy.
I've never seen anywhere in the market where you can generate the kind of monster returns so quickly than that of penny stocks, you just have to be savvy and discipline enough to know when the time is right.
Have an excellent day, see you tomorrow.