What to play & Sale of OLLI

One of my goals in trading recently has been to be more selective on which setups and patterns to trade. Even though I think that one can be successful in the markets, undoubtedly there is a lot of randomness inherent in the price action of stocks. Jumping into everything that is moving disregarding other conditions can be lethal in such a competitive and unforgiving environment.

One has to be selective – I have to become super selective. Therefore, in this post I want to present the current long patterns that I will focus on in the future.

  1. Breakouts

I am still a believer in the good old breakout, meaning that a stock finally breaks out of a range that it previously had trading in, preferably for many months. One has to distinguish between the two types of stocks, namely OTC or NASDAQ stocks.

1.1 OTC Breakouts

In my distorted opinion OTC breakouts tend to be the most reliable ones. Even though my last try in playing this pattern did not succeed, there is an ample sample size to back up my claims – at least that´s what I believe.. “CONFIRMATION BIAS!” one might rightfully respond. However, in order to mitigate this problem, for some time now, I have adapted the habit of writing down my expectations regarding the movements of the stocks I am watching. When I then later checked if what I had “predicted” had come true, the anticipated breakout had materialized in many cases.

One thing about breakouts is that one should not expect them to be perfect. After breaking out of the range, the stock very well may come down under the threshold again. Patience and strong nerves are required in this case – something that lead to myself giving back my profits in LQMT.

OTC stocks tend to gap up the next day after the breakout. Therefore, I like to buy them in the last trading hour, preferably on a dip. Often, they spike into the close and open nicely the next morning.

In April, PVCT spiked on strong volume close to its previous high of 6 cents. The next morning it gapped up and spiked as high as 6.79 cents before retracing.

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BTSC, broke out of its multimonth high at 2.9 cents. During the day it came back and retested the breakout. Support did hold however, A spike into the close, a subsequent gap up and a morning squeeze up to 4.6 cents resulted.

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AMLH closed just beneath its breakout level at 0.7 cents and then gapped up almost 10% the following morning.

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After breaking out, NBGGY has advanced impressively.

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1.2 NASDAQ breakouts

NASDAQ breakouts in my opinion are less reliable. The breakout here is not as strong an indicator. Below we see both CDTI and HUSA breaking out long-time highs. However, neither of the two gapped up. Instead, a strong consolidation set it.

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2. Former runners

Many good patterns present themselves in recently strong stocks. These are stocks having advanced many percentage points in the past, gradually coming down. There are three things I like to watch for.

2.1 Dip buying the morning panic

When a stock goes parabolic at some point it will crash. Often, the crash happens one morning and then it usually happens quickly. However, most often the stock rebounds strongly from its lows gaining back incredible percentages. Even though it is risky to catch a falling knife, buying opportunities emerge here – but please be careful.

ELED first went from 1 cent to over five cents. Then, when it finally crashed one morning it went beneath 3.4 cents before rebounding back to a high of 4.3 cents.

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ZPAS was one of the more impressive pumps in the recent past. Over weeks it literally increased every day. It went from around $1.5 to almost $3.75 before coming down.

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On one morning it crashed down to $2.1 before rebounding back to $3.1 – almost 50% of a bounce.

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2.2 Buying some days later

These former runner do not only offer dip buys. After the first crash usually a decline sets in for 2-4 days. Then however, many recently strong stocks spike again.

Two days after its crash LWLG came back.

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Three days after its crash CYCC came back very impressively.

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2.3 Buying red to green

Especially for these rebound plays I look for one setup. This is the threshold when the stock moves from being red on the day to green on the day. Then, often a spike results. This is most likely related to the fact that many, many short sellers are crowded in the downwards moving stock at this point. When the stock comes back again they cover –  most likely when it moves to being green on the day. A short squeeze ensures.

After two crazy days during which its price had multiplied 5 times, finally MTBC seemed to crash. It panicked in the morning and shorts stacked up. Then however, when it broke the previous day´s close at $1.55 it spiked up to almost $2.

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Just a day later the same thing happened. The stock had closed weak the previous day and opened rather weak. Then however, it broke the red to green mark and squeezed up to $2.7.

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These are just some of the patters which I think have become attractive recently. I will try to take my trades in a very selective way and only choose the ones offering the best reward-risk.

If these patterns really work or whether confirmation and hindsight biases work against me in this case is something that real trading will have to show.

Before leaving you guys I just want to announce that I stopped out of my OLLI position last Friday at $38.8. I would have enjoyed riding OLLI up some more but it has been weak after reaching its highs at $41. Since I did not want to give back too many of my profits I had set set my stop at this level of $38.8. Still, I bought at $34.2 and exited at $38.8 – overall a nice profit.

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Best,

Nils

Recap LQMT

I still have to document a trade from last week – unfortunately a loosing one. Liquidmetal Technologies Inc. (LQMT), a small company trading over the counter, was my target. After some time of consolidation, this had been moving up close to its previous highs of 29 cents. Given the price development depicted in the graph below, I expected a breakout to new highs on Thursday.

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LQMT opened strongly and I entered a small position at 28.62 cents. Due to relative illiquidity of the stock I was not comfortable playing it bigger.

At this point demand strongly increased and sellers vanished. On the level 2 one could steadily see big offers coming in and the ask being taken out. The whole price action and the level 2 tape seemed very bullish and LQMT went as high as 29.5 cents. At this point I was comfortably up on my trade. However, I did not want to take profits due to both my small position size and my goal to stay longer in the trade. In my trading plan I had promised myself to hold through momentary pullbacks and consolidations in order to ride the breakout up longer.

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Thus, I did not sell when signs of weakness showed up and at first I turned out to be right in doing so. Then however, something odd happened. At the highs of 29.5 cents, when the bullish action was at its peak, suddenly all the strong offers disappeared and LQMT dropped strongly down to just above 28.8 cents in a matter of two minutes.

This was the point where I made a serious mistake. I told myself that since I had promised myself to hold through consolidation even if LQMT would trade below the breakout level I would not panic and sell. Instead, I decided to hold further and adjust my stop to just below 28.7 cents. However, this was not a normal consolidation. Given the odd price action I should have seen that something was wrong. After some additional minutes LQMT completely crashed. Even though I had entered my stop it took me a while to liquidate my position and I ended up selling most of my stock at 28.11 cents.

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After rebounding a little, LQMT finally dropped as low as 27.4 cents.

In the days following Thursday, the breakout finally worked out more or less and LQMT went as high as 32.4 cents before retracing again.

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Lesson of this trade? If there are signs of something being wrong, just get out!

Best, Nils