Using these three quick tips, you can easily identify potential penny stock scams.
These scams go by many names. Some call them �pump and dumps� or paid promotions. But they all end the same way: average investors who were promised fast gains are left holding shares of a worthless stock.
Many traders sign up for e-mail updates from promoters to keep up with the endless stream of stock pumps. My e-mail address is active on countless promotion lists. And nearly every Sunday evening, the promoters steamroll my inbox.
It starts slowly. I might receive only five or six messages by mid-afternoon. By midnight, I could easily have 50 forwards all pumping the same stock.
The messages are simple. They offer a stock ticker and an urgent plea: buy this stock now, or risk missing out on the opportunity of a lifetime…
But you don�t have to sign up for these lists and deal with an endless stream of spam. Even if you don�t receive a single e-mail, I can help you identify these scams by simply looking at a chart.
Below is an example of a stock that has recently been heavily promoted. I have divided it into three sections. Each contains telltale signs you will find in almost every penny stock pump…
1. The Setup
Up first is the classic penny stock pump setup. This is the action that happens before the promotional material is released to the public.
There are several key elements to a common promotional setup. The first is the complete absence of trading volume a price action. Most penny stock pumps come out of nowhere. If it wasn�t for the promotional material, the stock would be untradeable and worthless.
You can see the evidence on a candlestick chart. Notice how the setup section looks completely different from the pump. There are virtually no full candles and volume is nonexistent. A penny stock that mysteriously begins to attract attention after sitting idle on the open market is your biggest hint that something fishy might be going on…
2. The Pump
After those who are in-the-know load up on shares, it�s time for the pump to begin. The pump is a time of pure euphoria for unsuspecting investors. They buy the stock and watch it rocket to new highs. Every dip is bought. Promoters send follow-up e-mails promising that the incredible performance is only the beginning of a never-ending run toward an obscene price target.
Almost every pump looks like the middle section of our chart. The promoted stock doubles or triples in just a few days or weeks. Trading volume explodes. The stock moves higher as newcomers fight for shares.
But the good times don�t last for long…
3. Hope? Or the End?
Once the buying slows down, everything begins to fall apart for a promoted stock. The big pushes higher are replaced by shakeouts and flat trading days. There might be one more push from the promoters to encourage the hopeful bag holders. But unless an extended promotional campaign is in the works, this is the most dangerous time to own shares.
If you bought a promoted stock � for whatever reason � this third stage is the time you must sell. As for our example, the big selloff has yet to happen. But when it does, anyone left holding shares will find themselves saddled with huge losses…
Thinking About Buying Stocks?
Don�t even think about buying a stock before I have a chance to rate it! Send all of your tickers, charts and questions to editor@pennysleuth.com.
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