So you want to trade a penny stock right? Looking to double your money? That's always the appeal with stocks that fall out of favor. One such stock now is Blockbuster (Pink OTC Markets Inc: BLOKA) a stock that used to trade at almost $18 and which now checks in at a whopping fifteen cents. Yes, you read it right. Fifteen whole Lincoln pennies!
So, is there a trade in such a stock? Clearly it is out of favor and the real risk in a stock like this is that you wake up some morning and find out that they are no longer in business. That is the real risk because they don't move a stock to the pink list because it is healthy. So if you choose to trade them, you have to be trigger happy and ring the register often. With a good broker and some money that you can lose, here's how I would size up BLOKA.
On the weekly chart, the selling on the week of March 29, 2009 is the intermediate term swing point low. Roughly 48 million shares traded there. Recently BLOKA traded and closed under that price on 26 million. That kind of volume makes the move suspect. It bounced as a result but the bounce wasn't worth the trade as the continued move lower after the suspect trend formed put a trader too far underwater to make money on the bounce. If you are trading long, you are looking for the trend to go suspect then for a reversal signal to form.
Flipping to the daily chart you can see how a bounce trade sets up. See how the July push came on lower volume as compared the June 14 bar? That makes the bearish trend suspect. Once that happens, you need a short term signal like an under and over close (where price pushes under the previous day's low but closes over it with lighter volume) or a candlestick Doji. When you have the suspect trend and a reversal signal, then you can take a shot at the long side. In this particular case it didn't issue the reversal signal so there was no trade, but if and when it does, that is the trade.
The better trade though is to simply short the spikes as they come into resistance when volume is light. Look at the shaded bars. On each of these price pushes higher, the surge fades and then reverses as the volume on the push higher is lighter than the volume of the bar being tested. That's the real trade on a stock like BLOKA. You short them all the way down as they double in price four or five times on the way to bankruptcy.
Thanks for listening, and until next time, just keep trading the charts.
At the time of publication, Little had no position in BLOKA.
L.A. Little, author, professional trader and money manager, writes daily on
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His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.