Penny Stocks are an Essential Element for Traders

Due to the recent and unfortunate oil spill in the Gulf, many of us are seeing the effect on the stock market and wondering what the future may hold. C. Thornton makes reference to this hot topic, providing an example for a momentum trading strategy. He offers other intriguing strategies in regards to penny stocks that you will find in this article. If you like what you read, be sure to check him out further at Buy Sell Short

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Penny stocks have long carried the mantra of the ugly step child when it comes to trading stocks on Wall Street, mostly because of the shenanigans prevalent in the OTC/BB market. However, traders that turn a blind eye towards small cap penny stocks are missing out on a great profit-generating sector of the market, a segment of the market that tends to outperform its large cap brethren in the early stages of an economic recovery, much like the one we are in the midst of right now.

I am here to open up your eyes to the potential in small cap penny stocks under the $5 price range that trade on the Nasdaq, Amex and NYSE stock exchanges.  The gains to be had from stocks $5 under can be very nice in percentage terms. Gains of 25-50% are common place in stocks where moves from $1 to 1.50 often occur regularly. The argument that these stocks lack volume is also somewhat of an old wives tale as often times the volume on many stocks under $5 exceed the volume on large cap stocks. Let us not forget DNDN, the big stock winner of the last week was trading under $5 only two years ago. Many large cap stocks of today began their trading lives as small caps. Think of the small cap stock as the true speculative segment of the stock market.

So how does one play the small cap stocks? One way I have found to be very profitable is the momentum trade. If a large cap stock or sector is outperforming the market there is almost always a peer that is trading in the under $5 price area. A recent example of course is the large move up we have seen in oil prices. Large cap oil stocks, along with the price of oil moved nicely higher over the month of April. The recent and tragic oil spill in the Gulf also brought momentum to oil and gas equipment small cap stock OMNI. From Wednesday through Friday shares of OMNI which provides oil cleanup services surged from $2.29 to $3.95 the following day on a 50-fold increase in volume, volume that again continued its frantic pace on Friday. This is common in small cap stocks.

Another strategy we use successfully at Buy Sell Short in trading penny stocks is a cyclical calendar strategy. Almost every year at the same time certain sectors tend to outperform the market. April through June is typically very bullish for penny stock biotech stocks with many large conferences scheduled during this period, the biggest of which is ASCO in early June. You may have heard the stock phrase “sell in May and go away!” Well the phrase we like to use is “buy biotechs in April and sell in June!” Two other key penny stock windows of gains are referred to as the “Santa Effect” wherein penny stocks do well in the days before both Thanks Giving and Christmas. Finally there is the January Effect that usually sees penny stocks spike sharply within the first two weeks of January, the reason here being many where sold in the last days of December for tax purposes!

Biotech stocks are among the best profit-making (and loss generating if you don’t have a trading plan) plays in penny stocks. Biotech stocks are a unique breed as they trade on speculation of big drug breakthroughs. 90% of biotech stocks NEVER bring a drug successfully to market yet many times they sport some of the largest valuations in small caps! Even when a biotech drug fails there is always hope that lingers and this brings us to our most successful penny stock trading strategy, the “Biotech Tanker Bounce Play” Even when a biotech has bad news and sells off dramatically within two to four weeks there is a large rebound that occurs. A recent example is PARD, Poniard Pharmaceuticals Inc. On March 24th, PARD fell 24% on bad news on one of its drugs. As you can see from the chart below after PARD fell it treaded within a narrow price range for next three weeks. Then on April 13th the Biotech Tanker Bounce began and the stock moved from $1.13 to $1.39 in a day, for a 23% gain. This is not an isolated occurrence. Next time you see a biotech stock fall large on bad news, monitor it for the bounce that typically occurs within three to four weeks.

Penny stocks that trade on the Nasdaq and NYSE and Amex should be a part of every traders trading strategy. So next time you say Penny Stocks are not for you remember this article and keep an open mind!

I hope you found this article helpful. If you have any questions or comments please contact me at [email protected]

C. Thornton

Buy Sell Short