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When it comes to trading penny stocks, it’s just trading, as I have said before.

What do I mean by that?

Price action, ladies and gentlemen, is king! When it comes to low-priced stocks that move independently, price action is what truly matters, not bias.

If you disregard price action and instead trade a stock based on what you would like to see happen, you might find yourself in trouble.

Yesterday provided a great example of just that.

So, I will go over a few lessons and warning signs that might help you identify when you should not go long and how you might capitalize on the short.

Verastem (NASD: VSTM)

VSTM is a development-stage biopharmaceutical company. The company focuses on developing and commercializing medicines to enhance the life of cancer patients.

The stock was gapping higher in the pre-market as the company announced a clinical collaboration agreement with AMGN.

This news saw the share price of VSTM rocket higher in the pre-market. At one point, the stock reached $3.96 before pulling back before the open.

Year to date, shares of VSTM are up 31.92%, and after yesterday, up 8.91% on the week.

Market Cap: 496.84M

Float:130.70M

Short Interest: 5.10%

Average Volume: 2.34M

Now, let’s take a look at some of the warning signs:

Looking Left

By zooming out and consulting the 3-year weekly chart, the bigger picture can be painted.

First of all, the stock is in a downtrend on a higher time frame. On a higher time frame, the stock has not been able to turn resistance into support. This signals that selling pressure has not yet subsided.

Secondly, each time the stock trades abnormal volume, it has signaled the short-term top and sold off.

Selling Pressure

During the pre-market, after the stock first reacted to the news and traded to $3.96, sellers stepped in, and the stock made lower highs and lows. Not the confirmation nor the action you would want to see if you are a bull.

On the 2nd of August, 2021, a 424B5 prospectus was filed with the SEC. This filing states that the company has entered into a $100M sales agreement with Cantor Fitzgerald & Co.

The action in the pre-market, the higher time frame downtrend, and possible dilution are all potential warning signs. All of which could hamper the ability of the stock to trade higher.

Selling Pressure Confirmed and Opportunity on the Short Side

Off the open, the stock broke the downward trend from the pre-market. Shortly after the breakout attempt, the stock failed to hold above resistance and slammed lower.

This signaled that the sellers were still in control. Price action confirmed the points I made above.

A short might have been placed once the stock failed above resistance and then broke below the support. That is a solid entry as momentum to the downside had now been confirmed.

Once the support had been broken, anyone who bought it in the pre-market was underwater, further adding to the selling pressure.

An excellent zone to take profits and close the short position could have been below $3, where the stock closed the previous day. This area of $2.80 – $2.90 was also where the intraday downward trendline leveled out.

The Bottom Line

While I believe the upside potential in penny stock trades outweighs the downside potential from going short, it is vital to have an understanding of the reasons why in-play penny stocks might not go higher.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

Don’t worry. I am not getting all philosophical with you.

Last week, ATYR Pharma (NASD: LIFE) was up 88.14%. A move this significant warrants a closer look into the stock.

As the overall market experienced a pullback last week, which has continued so far into this week, many small-cap names showed relative strength.

I have written about stocks recently, such as CEI and LPTX, which have held up firmly and displayed relative strength to the overall market. LIFE is no different, as the stock held onto its gains last week while the overall market pulled in.

What is LIFE?

LIFE, according to Yahoo, is a clinical-stage biotherapeutics company. The company engages in discovering and developing medicines based on novel immunological pathways in the United States. The company’s lead clinical product candidate is ATYR1923, a selective modulator of NRP2 for treating patients with severe inflammatory lung diseases, including interstitial lung diseases (ILDs) and severe respiratory complications caused by COVID-19.

Market Cap: 173.62M

Float: 13.74M

Short Interest: 3.02%

Average Volume: 4.85M

Last week, as I mentioned, the stock increased by 88.14%. On the month, the stock is up over 120%, and 165% year to date.

The stock has an average target price of $16, set by analysts that cover the stock. This target price is considerably higher than where the stock closed on Friday.

What was the catalyst last week?

ATYR Pharma announced positive data from phase 1b/2a clinical trial demonstrating consistent dose-response for ATYR1923, the company’s lead therapeutic candidate, in pulmonary sarcoidosis.

The news resulted in an explosive move to the upside. The stock opened the day up at $6.30 and closed the day near the highs, at $9. The stock traded an incredible amount of volume. Over 110M shares were traded, compared with the stock’s average volume of 4.85M.

Key Levels

Since breaking out on positive news, the stock has managed to hold up impressively near the highs.

As the stock has spent time consolidating since the first leg up, key levels have become clear.

Support is firmly at $8. This level of support was previously the resistance from day 1, which turned into support after the stock made a higher low at this price on a higher time frame.

$10 – $10.50 is resistance. This level is clear resistance from the previous two days of trading. $10 – $10.50 is also technical resistance from the bullish flag on the chart.

What’s next for the stock?

With the above levels in mind, I have formulated the following game plan for the stock.

Support for the stock is firmly $8. Therefore, as long as the stock remains above this level, without a negative catalyst hitting the headlines, the bulls will still be in control and confident.

If the stock breaks above resistance of $10 – $10.50 and then manages to hold firmly over $11, this might signal that a leg higher could happen, and the potential for a short squeeze could exist.

If the stock begins to consolidate near support and then break below $8, the bull thesis will no longer be valid in the short term. This move might signal a change of character and momentum in the stock.

It is also essential to maintain an overall view and interest in the market, as it is currently experiencing a pullback. The market pullback’s psychology shift and tail-wind effect might spill over into these setups, affecting the upside potential.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

Now and then, I see a theme play out. Whereby a sector or group of companies gain traction, momentum, and trade higher together.

Typically, these themes involve one stock, the leader, and other stocks, the followers.

The stocks which move in sympathy to the leader are usually in the same sector and industry as the leading stock and share similar characteristics. These characteristics could be float size, technical setup, short interest, and market cap.

The followers are what I refer to as the sympathy plays.

To better paint the picture, let’s look at an example.

At the beginning of the year, GME went from $20 to $483. As a result of this wild move, many other names ran in sympathy to GME. AMC went from $2.50 to $20 during this period. BB went from $7.50 to $28. Other names to move in sympathy during this period also included: KOSS, NOK, and BBBY.

Usually, sympathy plays will pop up once the main stock in-play has solidified its position as a significant short squeeze. In the chart above, you can see that AMC (pink line) began popping up and squeezing a couple of days after GME had already gained momentum.

Sympathy plays follow the leader. Therefore, as soon as the leader tops out, the sympathy plays also top out. This is also apparent in the chart above.

Alright, so by now, you should have a solid understanding of the concept I am discussing. But why am I covering this topic?

Sympathy plays present unique opportunities

Even though the GME action at the beginning of the year was incredible, It was not unique. On a grand scale like that, we have encountered exceptional opportunities before. During these times, there is an unbelievable amount of opportunity and risk: reward. Especially with the sympathy names.

Just off the top of my head, I can think of a couple of past situations similar to the meme stock run we saw earlier in the year. The cannabis sector, led by TLRY, and the shipping sector, led by DRYS. Both situations were very similar to the meme stock run.

How sympathies present unique opportunities:

  • Trading a sympathy stock is often easier than trading the leading stock.
  • The sympathy stocks are usually less volatile than the leading stock, allowing for better risk management.
  • Once the main stock tops out, you have time to adjust your trading plan in the sympathy stock and potentially capitalize on the short side as well.

Identifying potential sympathy plays

It would be best if you always were on the lookout for potential sympathy plays when a stock is in the process of a squeeze.

Take CEI and NAK, for example:

As CEI approached highs yesterday and looked to be potentially gearing up for a move over $2, interest grew in NAK. NAK was being spoken up on popular online social media platforms like Twitter and Stocktwits.

Many online cited a similar technical chart in NAK and CEI, a similar industry, and the potential for the stock to go up if CEI were to continue higher.

The comparison and increased attention, increased the share price of NAK by 7.93% yesterday.

This is certainly not a significant theme play or sympathy play yet, but it is a good example of a potential one.

As is often the case, the sympathy play will only continue to rise if the leader continues. So the NAK bulls would be hoping for CEI to climb higher.

More often than not, there are many failed attempts to identify the next stock to go.

That is why, when attempting to spot sympathy plays, it is essential to remain patient and let the stock show you that it is trading above key resistance and experience abnormal volume before you rush to get involved.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.