THE DISSENT

[m_stone_14]

Bill Panetta has a theory about this topic let me dig it up. Posted by: Bill Panetta
In reply to: None Date:1/2/2007 11:42:39 AM
Post #of 2190

Stocks That Make Kool-Aid Status: How Popular is my Stock?

By Bill Panetta
President of Breakout Trading
www.breakoutrading.net

That ghost of Jim Jones works in mysterious ways on the OTC BB and Pink Sheets Exchanges. There’s a special type of ‘Kool-Aid’ drink that traders and investors enjoy when trading small cap stocks, and this article will give you some insight into how to identify and protect yourself from sucking in too much of the red stuff. Let me stress, this article is not to degrade or put down traders or investors for buying these type stocks at all (I make good money on these type of plays all the time), we’re merely looking to get better at selling rather than hanging on and taking a positive trade that turns into a losing situation.

We have all invested or traded some big name penny stocks in our trading career. We all know the type of stocks that I'm talking about. We’re going to try to make some sense of when to sell these types of stocks.

In this article we are going to look at the Psychology (Message Boards) combined with Technical Analysis. (Charts). The Psychology part of trading is very important to my success as a full-time trader. A big motivation for me in writing this article is I have seen plenty of good buy-side traders, some of them close friends, make great buying decisions and then have no idea or clue when to sell a stock that they have nice profits in. The investors and traders that we are talking about had tons of profits in these stocks. What were going to try to accomplish today is getting better at taking profits, especially on KOOL AID (cult) Stocks.

Kool Aid Stocks have stories that claim will revolutionize the world. You have heard them before, Cures for Cancer. Billions in Diamonds. A blimp that was supposed to revolutionize Wireless Communications. Big contracts with Circuit City. Recently a CEO that claimed his penny stock was worth upwards of $50/share. When these types of stocks get mainstream exposure, they suck in novice investors what I call the 9-5 crowd and the frenzy begins. Now friends and relatives are in. The message boards are packed, with multiple posts per minute. Everyone is going to hit it big. Any detractors of the company are considered ‘bashers’ or believed to be ‘illegally short’ the company. They get banned, insulted, and attacked in groups. It can get pretty ugly. As the stock continues higher, the 9-5 crowd is hooked and now looking for that ‘retirement’ profit. They have no trading experience nor do they understand what Mass Psychology (Message Board Hype) , is or what to look for on the technical side (Charts). The fortunate part is that some of these people get lucky enough to make some money, but then, almost inevitably, the GREED kicks they drink the KOOL AID and something mysterious happens, there dream investments starts to go south.

Let’s see if we can figure out a way to find a top in a very popular stock using both MASS PSYCHOLOGY (Message Boards) and a very basic technical indicator like the MACD (Moving Average Convergence Divergence)

Let’s look at the MASS PSYCHOLOGY (Message Boards) first.

NOISE LEVEL: An indicator that I really like is a feature over at Investors Hub that gives me some really nice clues on stocks that have reached KOOL AID Status and could be nearing a top. Remember were looking for clues. One of the easiest ways to find out what the noise level is of a stock all one has to do is go to IHUB and click on the hot button http://investorshub.com/boards/most_read.asp and start looking at stocks that are the most read. Notice I specifically said most read (not the top boards or most posted). Not everyone posts. In fact, most people are just content to sit and read. The more people ‘lurking’ around a board show the larger audience the stock has. Browse a few of the most read posts and look for ‘cult-like’ activity. More than likely, you’ll see multiple posts giving the company glowing reviews. You might even catch a price target or two, well in excess of any reasonable share appreciation. It all sounds great, but what a lot of the people posting do not realize is that they all could very quickly become long-term shareholders in a go-nowhere company. You want to carefully time heavy ‘noise’ companies with those that are on a clear and sustainable uptrend, otherwise it’s akin to being sucked into a black hole.

Most of the stocks that you will see on this list are what I call broken stocks. Cult stocks that have gone bad. As you look at this list of companies especially in the top 5 most of these stocks have the biggest stuck holder bases on OTC & Pinks. You have to sell aggressively as your stock climbs into the top 5. Again this exercise is part of topping process of a stock. So check and monitor the list on regular basis to see what your stock is doing.

TECHNICAL ANALYSIS:

MACD: Lets talk about the MACD indicator. The MACD is one of my favorite indicators because it identifies the trend and the strength of the trend. We’re looking for a stock that crosses above the zero-line on the MACD, which can create a powerful move that can last weeks at a time. You want to see some sense of direction in this indicator. Although there are plenty of stocks that are ‘bottomed out’ as far as MACD is concerned, without any indication of a reversal, you could be waiting for months for a move higher. To illustrate this, I’ve included some stocks that gave us some pretty convincing warning signals as far as MACD is concerned. Let’s look at some charts and see if any of this makes any sense.