The Pump Challenge – Putting the Acid Test on my Method for Finding Short Term Runners

So I thought I’d start another quick little series of posts where I publicly test the method I described in my previous post about how to invest in penny stocks.

In that post, I described how I’ve had particular success buying depressed penny stocks that look ripe for an explosive short term move by identifying divergence between price and key money flow indicators.

I’ve decided to do this because I often hear statements from so called “experts” who say things like:

Hey look, this move in ABC was so obvious – look at x, y and z on the charts.”.

Whenever I hear this my eyes begin to roll. Anyone can make themselves look like a genius by pointing things out, after the fact. But for a technique to actually work and build wealth, it has to be able to predict market moves, before they happen.

In my experience, there are many people that claim to have the magical formula for picking stocks, but not many of them seem to be able to pick winners consistently.

I’m not claiming to have that formula. If anything I’m claiming the opposite – I’m still very much learning and refining my techniques, both for picking long term investments and shorter term trades.

But I’m more than happy for you guys to tag along with me on my journey as I put my methods and theories to the test – hopefully you guys can help me out and perhaps even learn a thing or two along the way.

It’s all about trying new things, learning from our investing mistakes, with the end goal of becoming a better investor and trader. This is going to be a test of the best method I’ve found so far for picking short to mid term winners.

So lets get into the nitty gritty:

How the challenge works:

I’ve gone ahead and picked five different stocks that have been showing up on my stock screening scans that shown signs of hidden accumulation (as mentioned in my post about identifying pump and dumps).

I’ve set up a spread sheet with a virtual portfolio assuming I’ve taken a $5,000 position in each stock, taking last nights closing price (21st July, 2015) as the entry price. The exception is RNU which I acquired last week, where I’ve used my average entry price as highlighted in my portfolio page.

The goal is to test how effective my method really is. I’m going to do this by monitoring the maximum price movement from the initial “buy in” price, over a given time period. This will then represent the maximum amount of profit (or loss) possible during that time.

That time frame is six months, so we are looking at a relatively short term investment – this method is all about picking short, sharp price movements. That six month period will end mid January, 2016.

I’ll try to report back every couple of weeks with an update on the portfolio’s progress.

The Picks

The table below shows five stocks I have picked as candidates from my recent scans. The table contains all the information I know about the companies (with the exception of RNU, which I have conducted my usual due diligence on):

Price as at 21th July, 2015

Stock Sector Initial Market Cap. Initial Price Current Price Peak Price Current %Δ Peak %Δ Peak Value
AZS Materials (DMM*) $14,000,000  $0.014   $0.014  $0.014 0% 0% $5,000
BSR Materials (Gold) $19,000,000 $0.013 $0.013 $0.013  0% 0% $5,000
BUY  Oil & Gas $10,000,000 $0.010 $0.010 $0.010  0% 0% $5,000
GDY  Utilities $14,000,000 $0.033 $0.033 $0.033  0% 0% $5,000
RNU Materials (DMM*)  $5,000,000 $0.021 $0.025 $0.025  +19.6%  +19.6%  $5,980
  TOTAL  +3.9% $25,980

*DMM = Diversified Metals and Mining

Below is a weekly chart for all five of the companies. You’ll note that all charts are showing:

  • A long (multi-year) basing pattern after a big down trend.
  • Bullish divergence between between price and my favorite accumulation indicator, Twiggs Money Flow (TMF).
  • A recent cross above the 0% line on TMF – experience has shown me this is often hints a move is imminent (and divergence that occurs without a cross above zero often amounts to nothing).
  • Very little interest in the stocks – typical weekly volume levels are very low.

NBWhen an “ID” tag appears on a chart it indicates the point at which I initially identified the stock as a potential short term mover and added it to my “breakout” watch list.

AZS

  • Long term down trend, after a big pump back in January, 2013.
  • Looking to base and showing first signs of positive divergence.
  • TMF just touched above 0%.

AZS weekly candlestick Chart

BSR

  • Formed a base after a long term down trend ended back in mid 2013. Has consolidated after an initial rise in mid 2014.
  • Positive divergence has been forming since the end of 2014.
  • Recently broke above the short term declining trend line – Looking to back test the trend line before (possibly?) moving again.

BSR weekly candlestick Chart

BUY

  • Strong positive divergence occurring since the end of 2014.
  • holding ground well in the face of dramatically falling oil prices.
  • Recent cross above 0% on TMF for the first time since back in 2012.

BUY weekly candlestick Chart

GDY

  • Basing pattern forming after multi year down trend.
  • Strong positive divergence evident since early 2015, with more subtle divergence since mid 2013.
  • Recent TMF cross above 0%. Currently retesting the signal line.

GDY weekly candlestick Chart

 

RNU

  • Almost four year basing pattern since the dramatic down trend ended at the end of 2011.
  • Strong positive divergence since mid 2014.
  • Strong cross and hold above 0% on TMF.

RNU weekly candlestick Chart

Precuationary Note: This method uses Technical Analysis (TA) only

It’s important to note that, with the exception of RNU (which I have recently added to my portfolio), I know next to nothing about the fundamentals of these companies other than their market capitalization and the sector they are in.

Before buying stock in any of these companies, I would usually conduct at least a good five to ten hours of due diligence research looking into factors such as:

  • Management credentials and past performance
  • Percentage of the company owned by management
  • Recent broker vs retail investor buying activity
  • The companies cash position and near term expenditure estimates
  • Near term relevant market sector forecasts
  • Product reviews and customer feedback (if applicable)
  • Review of the geology and/or nearby mines or discoveries (if applicable)
  • Etc. etc.

As you can imagine, proper research and due diligence would take a long time to conduct for five separate companies. Therefore, with the exception of RNU, this is a completely blind test, using nothing but technical analysis to identify potential short term runners.

My hypothesis:

So what do I think will happen? The fact I haven’t undertaken any of my due diligence makes me think that at least a couple of the picks will be a complete flop – there’s bound to be some fundamental reasons as to why these companies have performed so badly over the past few years.

But I’ve had a generally positive experience using this method over the past six months to a year – I’m highly hopeful we will see big gains from at least one of the picks – I’m hoping the gains more than outweigh any losses.

To sum up my expectations at the start of the “experiment”, I think we will see:

  • At least two of the stocks in the red. I’m hoping this will be no more than 20-30%, given that most of the companies are already trading near all time lows.
  • At least two stocks that end up in positive territory, with one big runner that moves upwards at least 50-100%. My guess would be RNU considering I’ve undertaken my usual due diligence and know they have good prospects and have very few “skeletons” in it’s closet.
  • One stock finish near neutral territory, i.e. +/- 10%.
  • An overall “peak” (i.e. taking the maximum price during that period) gain of at least 15% to 20% for the overall “portfolio”.

I’m hoping that the losers will be relatively modest in comparison to those (if any) that go for a big run, due to the fact that all stocks are trading at or near their all time lows. Part of the appeal of using this method is that a lot of these stocks have limited down side and plenty of upside potential – it’s a classic “buy low, sell high” strategy, with a bit of a short term spin on proceedings.

As these stocks typically get “pumped and dumped”, I doubt many of the stocks will undergo a genuine re-rate, but thats o.k. – again this is a method meant for identifying very short term price movements, not long term “buy and holds”. In saying that,  I hope that one or two may end seeing permanently higher prices.

Summary

To sum it all up, I’m putting my method of identifying potential short term runners to the test. I’ve done this  by creating a virtual “portfolio” containing five stocks I’ve recently identified using nothing but this technical analysis based method.

I’m going to monitor the movement of these five stocks over the next six months to see how they perform – taking note of the peak value they reach during this time so that I can calculate the theoretical maximum amount of profit (or loss) I could have made, had I actually purchased $5,000 of each stock.

It’s going to be an interesting undertaking, and I can’t wait to see how it all pans out. Whatever happens, it’s going to be a good learning experience and I’m looking forward to being able to analyse what worked and what didn’t, so that I can refine the technique in the hope of being able to make better gains in the future.

I’d be very interested to hear what you think – do you know anything about the fundamentals of the companies in the portfolio that you think will aid or hinder short term gains? Do you have an inkling about the larger macro conditions that may positively or negatively affect these stocks?

Happy Investing,

The Nude Investor