Momentum Play Punchlist

Genuine momentum stock plays always involve price movement on strong volume. If both price and volume aren't moving, avoid the stock like Typhoid Mary. But knowing that a stock is moving, even on volume, is not enough. To avoid getting scalped, here are the signs you are looking for. There are many sucker plays, and you must ascertain if the price and volume are real. The list below seems like a lot, but these things can be checked pretty quickly. If the stock fails at any point, forget it. Also be sure to check out our Rules of the Road tips for trading microcap stocks.

1. Chart and Profile it.  First thing, chart the stock on your favorite charting system. We like candlestick charts, and we look at 50-period moving averages (50 tradomg days on a daily chart, about 1 week on a 60-min. chart), volume and MACD. Look at both a daily and a 30-min. or 60-min. chart to see movement on different time frames. The daily chart shows the bigger picture, the intraday chart shows the movement as it happens. Be sure to pull up a profile or detailed quote on the stock to see how many shares are in the float. If the stock has millions of tradeable shares and trades 15-20,000 shares daily, there could be an avalanche of stock ready to hit the market.

Look at history.  If the stock is well below its recent high or 52-wk. high, then you want to see a positive moving average crossover on a 30-min. or 60-min. chart. If the stock is at a 52-wk. high (historically a dangerous sign), watch for confirmation it is still moving. Some stocks roll, meaning they move in a sideways channel, and on these buy at the channel's bottom or just as it moves off the bottom.

Look at volume.  Is the volume unusually high? A true momentum play should be moving up on volume, which indicates accumulation. To indicate accumulation, volume should be at least 30-40% higher than usual, preferably higher. Upward movement on normal or slightly-greater-than-normal volume indicates a sucker play. High volume should be taking the stock up or down; if the stock is not moving much on high volume, something ain't right.

Look at trend.  If the stock is approaching support or resistance, stay out; wait for it to hold support or break resistance as the case may be. Don't just look at the last week or month of movement, look back several months and see the trend - there's no point buying a momentum stock that is trending down.

2. Trading Activity.  Second, analyze trading activity. You need Level II service for this. If you don't have Level II service, you can get some of this information on a delayed basis at the official OTCBB site - enter the symbol and then click on the THE BOARD tab. Things you are looking for:

Time & Sales Data - look at the size and number of trades occurring - does it look like real or phoney volume?. Are the trades going at the ask, which means there is real buying? Or are they going at the bid, which means there is real selling?

Who's playing?  See who is buying and selling on the trades. If there is a lot of buying, who's doing it? If there is selling, where is it coming from? Different sources, or is the same firm buying it all up, or doing all the selling?

Look at Bid & Ask Quotations.  This is really important. First, look at the inside spread (high bid and low ask) - is it tight or wide? If the high bid is $0.50 and the low ask is $0.75, this is a $0.25 spread, which is huge! This means you would pay $0.75, but if you sold it 5 minutes later would only get $0.50. Look for tight spreads, like a nickel or less.

Market maker positions.  See where the market makers are positioned on the bid and ask. Is the inside spread tight or large? How many shares are on the bid and ask, meaning how many will they buy or sell? Are the spreads tight or wideLook for block trades, study the days trading pattern in the time and sales/transaction logs. Look for possible front loading, if a stock suddenly has volume the last few days on no announcement and then a sudden alert is e-mailed or brought to your attention

3.  News.  Look for recent press releases. Our preference is Yahoo! Finance, since they pick up all releases, even the cheap Internet newswires. It is very unusual to see volume and price surge without underlying news. Also look for news releases talking about events (merger, acquisition, divestiture, etc.) in the works but not yet completed, since those in the know could be moving the stock on inside information. (Buy on rumor, sell on news, remember?) Also look for reverse stock splits, name change or symbol change.

4. Google it.  Run a Google search on the company name and symbol (example: Oracle ORCL). This may give you links to stock tout and promotion sites that are featuring the company in newsletters and promotional email blasts. It also should give you the issuer's web site, which might have news posted.

5. Discussion Boards.  Do a text search on message boards such as Yahoo! Finance and RagingBull.com. You are looking for spamming (posts designed to spark buying activity) and rumors. If you see spamming and rumors, it is a sign that the jungle telegraph is aware of the stock and maybe feeding into the movement. But if the stock is not getting any activity on the boards, this may be even better, because you may have a chance to get in before the groundswell begins.

6.  Review SEC Filings.  This review is very important, and you can do it free at the SEC's EDGAR search site. We like 10K Wizard a lot, but to really use it requires membership (worth it). When checking the SEC website for recent filings, be sure to check for the very latest filings. You are looking for several things, in the order listed below.

Form 144.  Review Form 144 filings with the SEC made by company officers, directors and significant shareholders. Recent filings indicate plans to sell, and the activity you are seeing may have been created to absorb their selloffs. Form 144 filings reflecting any significant amount of stock is a big negative, since these sales will sop up the volume.

Form S-8 and S-3.  Look for Form S-8 filings. These are registration statements that allow an issuer to issue freely tradeable stock to officers, directors, employees and consultants. Also look for Form S-3 filings covering resales of shares by selling shareholders. These also are big negatives, since they indicate the volume is being drummed up to absorb the selloffs. Get into one of these with care. If you're really thorough, look at the most recent prospectus or 10-K/KSB to see how many of the restricted shares are eligible for resale. We looked at one company that seemed attractive and saw 30,000,000 shares of restricted that were eligible for resale - no thanks!

Form 8-K.  Look for current reports on Form 8-K, which covers material events, such as change of auditors, acquisitions, mergers, litigation, etc.

Form 4, Schedule 13D, Schedule 13G.  The Form 4 is a change in beneficial ownership by officers, directors and 10% or greater shareholders of a reporting company. The 13D and 13G are filed when a person acquires more than 5% of a reporting company's stock.

Other Filings.  Look for a recent 10-K or 10-Q that could have provoked the activity, although it is unusual to find a 10-K or 10-Q that can move stock without a related press release. Also look for a Form NT10K or NT10Q, which means that a required report will be late.

7.  Review Daily List. Check the daily list on OTCBB.com for filing status, previous symbol changes, reverse splits and name changes. A reverse split can (but doesn't always) really move a stock price up, which is meaningless to you the trader.

Horror Story:  Any Nasdaq Small Cap or NMS company can have the symbol of an OTCBB or PinkSheet company overnight, just for the asking. Years ago, I was involved with a company named ValueStar, symbol VSTR, a $1.00 stock. We got a call on Thursday at noon telling us that our symbol had been given to VoiceStream and that we would have a new symbol the next morning. No time to adjust! All hell broke loose when VSTR opened the next morning at over $100!!!