The Pump & Dump Challenge – Two Month Update

Back in the latter half of July, I posted about a little experiment I set up to test my method for identifying high probability short term trades. The method is heavily focused on the technical analysis of stocks, and in particular, unloved speculative stocks that show signs of hidden accumulation.

Deciding how to pick stocks, especially in the short term, is often a difficult process for a beginner investor/trader and it’s taken me a number of years and countless hours looking at both company fundamentals and technical charts to find a couple of methods that seem to work for me (at least as far as my trading strategy goes).

I coined this experiment the “Pump and Dump” challenge, because it’s a method I’ve used over the past 12 months to find good stocks to invest in now that tend to experience rapid short term gains, but often equally as rapid falls.

If you’re aware of this type of behavior (as you should be if you’re investing in the speculative end of the market), these stocks can provide reasonably lucrative short term profits if you buy in before the “pump”, and sell before the “dump”.

Just beware, this is a very high risk form of investing and is NOT recommended for those that are risk averse – remember I’m still in my 20’s, with no dependants, therefore I have a very high risk tolerance.

The Method – A Recap

For those after a quick recap; the method I use to identify good stocks to invest in now revolves around finding unloved stocks that are showing signs of accumulation.

This is as evidenced by divergence between price and a key type of accumulation indicator – Money Flow (I specifically like the Twiggs Money Flow indicator).

This often indicates that “smart money” (i.e. someone with a lot more money than the average mom and dad investor) is accumulating stock at current (see depressed) prices.

It indicates to me that someone with big pockets see’s value at the current price level and anticipates much higher prices in the future.

See the chart below for a classic example from one of the stocks in the challenge, Azure Minerals:

AZS example - technical analysis of stocks

Example of identifying divergence (accumulation) which lead to a sharp price increase.

For those that haven’t followed this challenge from the get-go, a full explanation of the challenge can be found my visiting the original post here.

Stock Performance

I ended up picking five stocks and assumed a theoretical $5,000 investment in each. I assumed my entry price was the highest value traded on the 21st of July, 2015 (with the exception of RNU which I had actually purchased a week prior, using the same identification method).

It’s now a third of the way through the challenge (two months), how have my stock picks performed? The table below highlights both their peak value attained throughout the last two months, and their current valuation today (28th of September, 2015):

Price as at 28th September, 2015

Stock Sector Initial Price Current Price Peak Price Current %Δ Peak %Δ Current Value Peak Value
AZS Materials (DMM*)  $0.014 $0.035 $0.038 +150% +171% $12,500 $13,550
BSR Materials (Gold) $0.013 $0.011 $0.016  -15% +23% $4,230 $6,150
BUY  Oil & Gas $0.010 $0.011 $0.012  +10% +20% $5,500 $6,000
GDY  Utilities $0.033 $0.027 $0.035  -18% +6% $4,091 $5,300
RNU Materials (DMM*) $0.021 $0.014 %0.026  -33%  +24%  $3,333 $6,190
  TOTAL  $29,654 $37,190
Δ% +18.6% +48.7%

*DMM = Diversified Metals and Mining

Check out the charts below for a graphical representation of the five stocks share price performance:

The Charts

AZS
AZS weekly chart

AZS weekly canldlestick chart.

The text book example regarding what can happen when you identify strong divergence between accumulation indicators like Money Flow and price. Price broke out strongly and has since risen to a peak of over 170% from when I first identified it back in July.

Money flow remains extremely strong, although it’s starting to show signs of supply. As I now hold stock in AZS, I will be watching to see if this is a pause in a sustained uptrend, or a true “pump and dump”. Whatever the case, I now have stop losses in place to protect my capital.

BSR
BSR weekly chart

BSR weekly candlestick chart.

BKY reached it’s price peak on the same week we started the challenge, and hasn’t shown a lot of movement since, hovering around my “buy” zone. However, divergence has only gotten stronger, and I’m still confident we may see some further gains further down the track.

 

BUY
BUY weekly chart

BUY weekly candlestick chart.

Like BKY, BUY has been relatively quiet. The divergence has steadied, but Twiggs Money Flow holding over zero is a rather bullish sign, especially considering sentiment in the oil and gas space (something BUY is heavily leveraged to) is at all time lows.

I expect to see some action should we see some positive developments in the price of oil and gas.

GDY
GDY weekly chart

GDY weekly candlestick chart.

No real action out of GDY. The divergence remains strong, although the strength is tapering off. Twiggs Money flow remaining above zero indicates bullish conditions remain and I’m still hopeful we we will gains over the remainder of the challenge.

RNU
RNU weekly chart

RNU weekly candlestick chart.

It’s funny that the one company I conducted due diligence in (and actually bought stock in real life) actually had some of the worst performance, at least in terms of current gains (or in this case losses).

After buying in, the stock did see some nice, quick gains – spiking to $0.026 from $0.021, however, the companies drilling results did not return any significant hits, hence the dramatic fall to as low as $0.010. I was stopped out of my position for a small loss and no longer hold.

After showing strong divergence for some time, Twiggs Money Flow is now strongly below zero, indicated bearish conditions. With no significant pending news flow expected, I don’t expect to see RNU back above my “entry” level any time soon.

My thoughts?

Overall, the stocks I picked for the challenge have actually performed better than my expectations, thanks largely to a huge run from Azure Minerals (AZS) over the past week or so. AZS has risen to a peak of over 170% from my “buy in”, and currently sits 150% above the entry level.

I actually ended up purchased AZS stock at $0.019, and again at $0.033, so I’m sitting on some nice “real life” gains from AZS at the moment.

Surprisingly, without exception, all the stocks I picked showed gains at some point during the past two months, ranging from 6% to 171%, with an median of around 20%.

In all honesty, that’s a lot better performance than I was anticipating as I assumed a couple would be straight out “duds”, given I undertook absolutely no due diligence (again RNU was the exception).

Remembering that this challenge is all about testing how to pick a stock for short term gains, seeing four of my five stocks rising at least 20% in such a short space of time is highly encouraging.

As it sits right now, if I’d held all five stocks for the entire two months since inception (unlikely as I would have placed stop losses to ensure gains were “locked in”), I’d be sitting on an 18% gain – not a bad two month return (a 108% annualized return).

If I’d managed to sell each stock at it’s peak (something that is highly unlikely), I could have banked as much as a 48.7% return (a 292% annualized return).

In reality, my returns, had I actually purchased stock in real life, would likely have been somewhere in between those two numbers, probably around the 25% to 30% range.

These results particularly impressive when you consider the XJO (S&P ASX200) declined by a whopping 13.6% over the same period and we have seen some of the highest levels of market volatility in over six years!

In saying that, it’s also important to bear in mind that had I posted this update 2 weeks ago, I would have been looking at something near a break even situation, or even a loss, as AZS hadn’t undergone it’s run yet. It ran largely because of some bonanza silver grades encountered at one of it’s Mexican prospects.

Some may say the run with AZS was due to pure luck, and there was undoubtedly some luck involved as even solid companies with great geology teams rarely hit the “mother lode”. However I don’t see it entirely that way, as “smart money” tends to flows into those stocks with the best prospects at the right prices.

My method for finding those aims to identify that “smart” buying, in order to piggy back off their research – something that clearly worked with AZS.

Summary

In summary, at the one third mark in the challenge, I have been more than impressed with the results I’ve achieved so far. I managed to see paper gains in all five of the stocks I picked at some stage over the past two weeks, with four of the five stocks experiencing gains in excess of 20%.

Since then, three of the five stocks have drifted into negative territory, highlighting the high level of volatility when dealing with the speculative end of the market. However, it also shows that quick gains can be made if you find the right stocks to enter at the right price, and have a plan for preserving gains (i.e. stop losses).

I look forward to seeing how these stocks perform over the coming four months, particularly in light of the overall high levels of volatility in the overall market!

Happy Investing,

The Nude Investor

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