This is a classic trading post from 5/16/2009 originally published on my investment blog GoodeValue.com. This is the last such post I will re-post here on Reaper Trades.
A lot can be said about short sellers. One undeniable fact is that short sellers are the sellers of last resort. When everyone else wants to buy, the only ones who wish to sell are often short sellers. In fact, while many fear the depredations of short sellers manipulating the market with bear raids (of which there is little evidence), short sellers are the ones who protect the market from pump & dump schemes and bull raids (a bull raid being a concerted promotion of a stock when the promoter is not being compensated; certain stock pumpers will engage in these from time to time to enhance their credibility). It is worth noting that pump & dump schemes are common in OTC and Pinksheets stocks that usually trade for less than a dime per share, but there are almost none in higher-priced listed stocks. The reason for this is that margin rules and difficulties borrowing shares to short prevent short sellers from being the sellers of last resort for penny stocks. For listed securities they are more easily able to sell. It is the fear of short sellers that causes most stock pumpers to avoid stocks trading for over $1 per share on exchanges like the NYSE and Nasdaq.
Sometimes pumpers get a little cocky or a short seller gets lucky and a pump & dump runs headlong into the brick wall that is a motivated and well-funded short seller. Whatever the reason, this short seller was able to find plenty of shares to borrow of last Thursday’s pump of Alanco Technologies (ALAN). This pump (or in this case a bull raid, as the pumper reported having received no money to promote the company) came from stock tout Stockpreacher (about which I have written previously). Stockpreacher released its ‘report’ on the company just as the market opened and ALAN jumped 100% from an opening price of $0.49 to over $1.00 in less than a minute (this was no doubt caused by Stockpreacher’s idiot subscribers buying with market orders). The stock touched a high of $1.30 but very few shares traded hands above $1.05.
ALAN Daily Stock Chart (pump and dump day highlighted; click to enlarge)
Seeing that the stock was up an insane amount for no reason other than a bull raid and that there were shares available to short, I quickly started selling large blocks of shares. I knew that the only reason the stock was up was a bull raid and I knew from past experience that previous Stockpreacher bull raids dropped quickly from their highs. I quickly exhausted all 12,550 shares of ALAN available to short at my main brokerage, Interactive Brokers (see a screen shot of my trades there). I then moved on to another brokerage account that had shares available and sold short another 34,500 shares. I had an average short price of $1.01. My fusillade of short sales (I sold over 2% of that day’s volume in the span of a couple minutes) helped to keep the stock from hitting more outrageous highs than the already outrageous $1.30 it briefly hit. How do I know? Stockpreacher’s bull raid on BOSC from the previous week (for which no shares were available to short at any of my four brokerages) had driven the stock price from $0.60 to an intra-day high of $5.80.
ALAN Intraday Stock Chart (click image to enlarge)
About an hour and fifteen minutes after I first sold short, I covered my short position at prices between $0.60 and $0.65. I netted $17,322 for a few minutes’ work and I got the satisfaction of helping to counter the manipulation of a notorious stock tout. It was indeed a good day.
How You Can Profit from Pump & Dumps
Some fellow stock traders were impressed with my courage in short selling a stock that was up 100% on manipulation without even waiting for the buying pressure to ease up. My response was simple: manipulation has its limits. I am now nearly an expert on manipulation and hype, having learned from Tim Sykes how to short sell manipulated stocks. I knew from observing the previous Stockpreacher bull raids that the stocks always dropped quickly from their intraday highs. There are no easier trades than short selling a stock that has been manipulated 100% higher when you know the manipulation is going to cease (Stockpreacher does not keep pumping the stocks it selects for bull raids after the initial day). That being said, it is scary to quickly take a large short position in a volatile stock. To do so requires both understanding hype and manipulation and confidence in being right. Unfortunately, until the last couple weeks (during which I have made several great trades), my confidence has been poor (like my trading) this year.
As I have mentioned repeatedly in my articles on becoming a stock trader (Part 1, Part 2) and in my Introduction to Evidence-Based Investing, the bane of any trader (or investor) is emotion. Fear and greed are both anathema to successful trading; a trader should be confident but not overconfident. Trading involves implementation of a specific plan; emotion will distract from the plan and lead to poor decisions. I have struggled with my trading this year, suffering from a large draw-down in my secret super-awesome trading strategy, suffering from meager profits in my pennystocking trading strategy (Tim Sykes’ strategy), and even messing up my arbitrage trades.
As a result of the above troubles, my account dipped into negative territory and I was feeling horrible. While I gained 5.13% in January and gained 5.32% in February, I lost 3.81% in March and lost 9.90% in April. I resolved to dial down my risk a bit and focus on fixing my trading errors. I revised my super-secret trading strategy (which had been responsible for 80% of my profits and losses) in a way that only slightly reduces returns while greatly reducing risk. For my pennystocking trades, I focused on getting my confidence back. The best way to do that is to focus on the easiest trades. So, knowing how easy it would be to profit from short selling a Stockpreacher pump, I followed each one and did not let my fears keep me from taking a huge short position in ALAN. It helped that I follow Tim Sykes and he kept reiterating the ease of profiting from stocks up on hype alone. That strategy seems to be working as I am now up 12.14% so far this month (and May is only half-over!).
Now I have my confidence back and will look to improve my performance in more difficult trades. Of course, there is no reason for me to abandon the easiest trades! If possible, I will gladly sell short 100,000 shares of the next Stockpreacher pump!
Chart of my cumulative profit trading Tim Sykes’ strategy
Disclosure: No Positions. I am an affilliate of Tim Sykes as well as a customer, having purchased multiple of his DVDs (I recommend Pennystocking Part Deux; it is by far the best) and being a Lifetime TimAlerts member. I have a disclosure policy.
0 thoughts on “How I Stopped Stockpreacher’s Alanco (ALAN) Bull Raid”
I think I’m going to enjoy your writing and website, of course I liked it at the Fool as well.
I really hate to hear you’ve been in a slump, but I guess that happens. Even in my career you tend to lose your edge every now and then, especially on smaller jobs with less people, you tend to take things for granted then next thing you know something goes wrong.
I have stopped trading until I get a better handle on my trades, quit going blindly into trades. I am taking your advice and reading about Tim, I will join when I have gone as far as I can go, I also started reading about Muddy and his site, good stuff.
I am sure you are learning from your mistakes, thats the most important part atn the end of the day, identify and correct.
Preston — I’m not really in much of a slump now — the Stockpreacher helped get me out of it (keep in mind this post was originally written in mid-May. More than anything I’ve been lazy in my trading the last two months as I’ve had to deal with so much other junk (there is a lot to do to move interstate!) and I’ve been on a fitness kick.
The good thing about trading is if you are in a slump you can always choose to not trade or trade small.
Ok, first I thought I commented on the wrong blog, now I realize that it was some time ago, my bad.
I will be moving to Baytown Tx. end of this year so I will find out what your talking about, and leaving a decent house for a company apartment to boot. Hopefully I can do what my company wants in Tx which is start a new division.
I’m glad your doing good, I will continue reading and learning. It does seem to me that what you do is somewhat more steady and even though it’s not huge one time sells it seems that if everyday you stick to your strategy, taking small rpofits and developing a system that works for you is good.
I noticed you might offer a paid service one day, that would be great. I really would like to learn, not just get stocks given to me, learning to me is 95% of it, thats the fun part, the money will come later.
My boss sent me a email some time ago, it was a pump for a stock, if I knew what I know now I would have took advantage of it (NXPN), it was around 1.57 and it’s .03 now. I told him then to leave that alone, I looked at there financials, read the entire pump sheet, at the bottom it said they were paid to promote the stock. At the time I knew very little about shorting.
Ha! My dentist’s office in St. Louis was actually next to the office of a penny stock. It is crazy how smart people will be snookered by such crap.
“Some fellow stock traders were impressed with my courage in short selling a stock that was up 100% on manipulation without even waiting for the buying pressure to ease up”
Blind luck, thats all… Would love you to repost this theory now Reaper given stocks up 500%+ on pumps lately, that havent retraced as much… You would be screwed if you followed this niaive logic from 2009 in the past 2 weeks.
There are large differences between a NASDAQ stock that goes up 100% in a few minutes due solely to a stock pump and a penny stock with a controlled float that goes up 500% in a few weeks due to stock pumping and coordinated press releases from the company.
Looking just at StockPreacher’s pumps (Nasdaq or OTC BB), short selling the stock once it was up 100% in a few minutes and then closing the position at the end of the day would’ve been hugely profitable (shorting at 50% up probably would’ve been uniformly profitable as well). I would’ve done it more if I could’ve found shares to short more often.