Anatomy of a penny stock short selling opportunity

In my videos and in the chat room, I try to convey to traders the importance of avoiding discretionary trades, or otherwise entering or exiting trades emotionally with more ego than objective analysis as a guide.

In this post, I will dissect a play that occurred Thursday, April 1, on a stock that had been on my Watcher list recently. The ticker symbol is AEN. Earnings anticipation was a factor in the rise. See this article from Friday:

http://www.tapebeat.com/2010/04/02/the-rise-and-fall-due-to-anticipated-fourth-quarter-results-nasdaqaen/

The set-up:

A cheap equity that went up in price substantially over 4 consecutive trading sessions. Not a Supernovae, but kind of a wanna be stair-stepper. The previous close of March 31st, was about 1.87, which was the first red daily candle day. See the above daily chart.

A common error I myself admit to committing is ignoring for shorting purposes a stock AFTER the first red session, even on Supernovae plays. The reason this is a mistake is that often, either almost immediately (as in this play) or several sessions later following congestion or any consolidation or range bound price action, such a shorting candidate provides an excellent, if less popular, short play as occurred with AEN.

An additional bonus is share borrows or reserves are easier to come by than on anticipation of the initial drop attempts, after early bird shorts cover. The play becomes less high profile as the crowd assumes it is less desirable, but that is not always so.

This stock, despite being a penny, was NOT a promotion or blatant pump and dump. Some penny stock blogs/sites and promoters will try to catch a free ride off high flying symbols that they are not involved with pushing, to get attention, so be aware of that.  Your trading methods are impacted by these distinctions.

Some cheap stocks are found on major exchanges, that are "real firms" with current depressed share prices, another thing to keep in mind as you scan for the pure chart patterns. AEN is an AMEX stock, making its pedigree about number 3, behind NASDAQ and finally the NYSE. Do not confuse the gutter with the caviar. 

The entry cues and possible risks:

The stock opened Thursday on a gap down, at 1.78 which made the net price of the stock negative. The net price of a stock is an important concept in determining the daily fortune of a stock. Some charting packages may permit a trader to track this, and other session comparison markers, like the opening price signal.

While these concepts are more commonly applied to "real" stocks with higher share prices, some similarity in their usage often exists in practice.

If a stock trades below its previous close, thus making it net price signal negative, this is a bearish sign.

In the first 5 minute candle, AEN overtook the previous close, reaching 1.91, reversing the daily net price of the stock, or in amateur terms, it went "red to green" intra-day. But it did not last. Soon AEN fell in that initial candle in the first minute of trading, going back to net price signal negative. The first few minutes of any trading session are often the most volatile and tricky, which increases the risk for early fence siders. Bear it in mind.

It is often preferable but not always possible if you wish not to pass on a play, to enter shorts later in the day.

One reason is that the risk of being shaken out on spikes or bounces is more of a factor in entering early.

Further, if a stock drops soon after the open, to get a position established with acceptable future down side, you will feel a desire and a valid argument need to chase, which is riskier. Worse, without a slippage prone market order to enter the position, you may not get filled, or get filled in time. All of this applied to AEN.

     

One hesitates to call this true morning panic, in spite of the previous day's afternoon slide, and despite the volume/range on the first two 5 minute candlesticks, since it did not really traditionally cascade (stop loss snow-ball) or ideally continue. Nevertheless, it was a typical bad omen. See the above 2 day 5 minute chart. The red candle in the center is the Thursday open. The first two 5 minute candlesticks resembled those from Wednesday's trading session.

Scenarios like that of AEN with opening bell price action like this often fade gradually with predominately small ranged candlesticks all day, as AEN did. A play like this will not win prizes for originality or excitement, but it does pay the bills, for the bold short jumping in who sets a stop above the initial red to green daily high that recently failed to hold.

The ideal same day exit:

A cover usually follows near EOD, as the long slide that can follow is like watching paint dry but it can put in new and difficult to time lows as it progresses. If you took this gamble in the first few minutes on AEN, it paid off.

This play shows the student that real thought usually goes into taking a position and actively managing one.

Discretionary trades (aside from early entry pure momentum scalping) are often hard to rely on as a bread and butter approach. Before entering or exiting a play, do your home work. Do not do so without research!


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