Warning!! A bounce play played incorrectly can totally wipe out your account if you do not know what you are doing. This takes a lot of experience to attempt this kind of strategy. The timing of a bounce play is very critical in nature. There are many factors that need to line up to attempt a successful bounce play.
If your personality as a trader or investor is very aggressive, this strategy will come very natural to you. Think of a bounce play as a rubber band. From for a moment pretend that you have a rubber band in your hand and take the rubber band with both hands and stretch it as wide as you can. The farther you stretch the rubber band the greater the force will be when you let go of one side. There is great force and velocity behind that. This is what you’re looking for when playing a Penny Stock bounce play.
TheStockWizards.net is looking for a stock to get stretched so far that it presents an opportunity to make some good money. Lets talk about some of the ingredients that we look for in this situation.
The first thing that you want to look for when prospecting for a bounce play is a stock that has great liquidity. What is liquidity? Volume. Because we are using a strategy of producing quick gains liquidity or volume is the key factor. Why do you want to trade a stock that has a lot of volume? So you can get in and out without hurting the stock.
Second, you must know some basic Fibonacci Retracement Techniques. This is not very hard to learn.
Thirdly, using some key moving averages will help you make better decisions. We will discuss this in detail later in the article.
Finally, you must understand when there is a gap in the chart. I will show you what a gap is in detail later on in this article.
Let’s look at some examples of successful bounce plays.
Example #1
WAMUQ (March 9, 2010) this is a stock that has a lot of controversy surrounding it. For those who follow the stock, you know what the story is. Starting on March 4, 2010 the stock started to break out and started heading higher. The stock went from .28 to .72 cents in the matter of four trading days. The stock gapped up three days in a row. On the final day, the stock gapped up from .55 to .70 cents. This was a huge gap.
(Gaps) If you do not know what a gap means let me explain it to you. A gap is when you take the stocks previous day close and the next days opening price. Example, if XYZ closes at .50 on Monday, the next day, Tuesday the stock opens at .75 cents. That gives you a gap of .25 cents or what Penny Stock traders refer to as “free money” when holding your stock overnight. The gap represents no trading between .50 to .75 cents. 100% of the time a gap will be filled when trading penny stocks at some given point.
So, in this instance WAMUQ gapped up .15 cents before falling apart. The stock makes a double top on the intraday charts and then it explodes to the downside. Totally crashes.
The topping process took about an hour and a half before it made its big move to the downside.
Let’s talk about what we are looking for in a bounce play. Like we said before we need volume and the stock had enormous volume so that met our first criteria. Second, WAMUQ gapped up three days in a row so there were gaps to fill on the downside, another criteria met.
(50% Hair Cut) Let’s talk about Fibonacci Retracements. To read more on Fibonacci Retracement click here . Now using our rubber band theory that we talked about earlier, we are looking for the rubber band to be stretched, or in terms of a penny stock you’re looking for the stock to make a huge move to the downside. We want the move to be hard with a lot velocity and volume. WAMUQ had a high of .70 cents for the day. Using the high of .70 we are going to divide that number by 2. .70 divided by two equals .35 cents.
Using this equation TheStockWizards.net will not attempt to even buy one share of stock in WAMUQ unless it hits our number of .35 cents or lower. TheStockWizards.net never buys into any bounce play until at least a 50% haircut has been accomplished. In the case of the stock, WAMUQ came right down to our 50% haircut number of .35 cents. Actually, the stock price went one tick below that .34-cent number. So another criteria was met for a potential bounce play.
Now, up to this point the stock has fulfilled its 50% haircut and filled the gaps. We are potentially setting up for a nice bounce play. However, we still need to meet certain criteria. Lets talk about them.
(Moving Averages) another criteria we look for on a bounce play such as WAMUQ had, we will go to the daily chart and look for a support level from the moving average. Again, you do this from the daily chart. If you look at the daily chart below, you will see that the stock came down to the 10 day moving average and gave the stock strong support. Another criteria has been met. Let’s take a look at the last key ingredient to make this the ultimate bounce play.
(Volume) When you are looking for the absolute bottom on a bounce play volume is the key. All you have to do is go to a five-minute intraday chart and put a volume indicator on that key timeframe. We will discuss this with a chart example. When you start to see abnormal volume kick in on a five-minute chart it is time to move in for the kill.
Looking at the five minute chart of WAMUQ there was no five-minute bar that had more than 5 million shares traded in a five-minute period, until one bar did 10 million shares in a five-minute. That was your warning indicator that the stock was about to make a reversal when you get the one big blow off volume bar on your 5 minute chart. This is when you want to start buying for a reversal. (See the chart)
In summarizing bounce plays, you must have disciplined and be very patient. Let the trade come to you. Do not force the action. Waiting for your criteria to be met is very critical.
Gaps: Are there any gaps to be filled?
50% haircut: has the stock drop by at least 50% from the high of the day.
Moving averages: are there any moving averages that line up with your other criteria?
Volume: make sure you have a five minute intraday chart up with a volume indicator just like we have on the StockWizards.net 5 minute chart. Wait for a volume breakout that is bigger than any other bar.
Just remember bounce plays can also be disastrous if not play correctly. However, if you play them correctly, you can make some good money in a quick period of time.
Good luck
TheStockWizards.net.
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