Stocks are trading pretty flat today, ahead of another busy earnings release date after the close. Stocks reporting their quarterly results include Facebook, Visa, Tesla, PayPal, and others.
However, I could care less about trading these stocks…
They are dead money in my eyes.
Wall Street firms hire teams of analysts to cover large-cap stocks like Facebook. These analysts get paid big bucks to visit the company, go to conferences, and speak with insiders about accounting, legal practices, and so much more…
(Facebook reports earnings tonight, there are about 40 analysts that cover stock, good luck trying to beat them)
How can the part-time trader who has a fraction of the resources that Wall Street firms have compete without losing their shirt?
Wear a different shirt.
So what are some of the advantages of trading small-cap penny stocks?
- Most Wall Street firms don’t cover the stocks (research and issue recommendations)
- Most institutional investors ignore these particular stocks altogether
- They run on predictable patterns and catalysts
- The level of competition drops, instead of trading against pros you are competing against “retail” traders
For example, if you recall my case study in Seelos Therapeutics (SEEL)it was all about the pattern and the catalyst…
(If you want to learn how to trade the fish hook pattern, check out this presentation I made for you)
And you know what?
Not one single Wall Street analyst is covering the stock!
(Winning in stocks is about picking your battles… give me 90 days, and I’ll make you a better trader)
That said, I want to share with you a recent story in a large-cap company, Boeing, which and why the news was so tricky to trade. Lastly, I want to show you how to find an edge with small-cap stocks. Read on to learn more…
Why Small Cap Stocks Might be Better than Large Caps
Now, you might be thinking, “Jason why don’t you like to trade large cap stocks?”
Well, to me, it’s a really crowded area… and it’s hard to gain an edge.
For example, Boeing (BA) released earnings this morning. Well, in its first quarter 2019 earnings report, it had some negative comments… and many traders thought it would’ve caused the stock to drop.
Here are a few takeaways from BA’s earnings release and conference call.
- Boeing announced it would pause share buybacks. Typically, if a company pauses share buybacks… the stock should fall. You see, when a company announces it’s conducting share buyback, it’s actually boosting its earnings per share (EPS) figure… in turn, traders price in that event.
- Boeing withdrew its full-year 2019 earnings and revenue forecast due to uncertainty surrounding its 737 Max aircraft. However, the company did note it would issue new guidance at a future date.
- BA’s EPS and revenue came in below the consensus estimate.
When you read that, does it sound like a stock that should go up?
No, it doesn’t, right?
Well, here’s a look at BA on the 15 minute chart.
You’re probably wondering, “Jason, if it there were negative headlines, why did the stock go up?”
I don’t have a clear answer for this… but what I do know is that there are a lot of exchange-traded funds (ETFs), hedge funds, and other investment managers in the name. Not only that… there is a slew of Wall Street analysts who are constantly researching and providing research to their clients. That said, there’s a lot of noise when you’re trading large cap stocks.
The whole idea here is the fact that there are a lot of players in large cap stocks… and it’s hard for retail traders to actually figure out what’s going on with these stocks some times… and of course, it’s hard for retail traders who don’t have the resources like the large banks and funds do.
That said, traders like us probably don’t have an edge trading large caps.
You Can Actually Find an Edge in Small Caps
Well, what’s the solution to trading large caps?
Trade small cap stocks, as well as penny stocks.
You see, with small cap stocks and penny stocks… you can actually define an edge. The reason being: you’re not competing against large Wall Street firms with virtually unlimited resources… You’re competing against retail traders.
Not only that, small caps and penny stocks don’t get analyst coverage. So that reduces some noise. In other words, it’s not likely for a Wall Street firm to recommend or issue a price target on small companies because it’s not worth their while…
Moreover, investment management companies aren’t really interested in small cap stocks… they focus on much larger companies.
So how do you find an edge trading small caps?
They run on chart patterns and catalysts.
If you can spot potential catalysts… the stocks actually move in the direction you’d think they would… unlike large caps. Now, if you can pair both catalysts and chart patterns… that’s when you can really start to make money.
You see, there were a few indicators telling me this stock could be done selling. First, the relative strength index (RSI) was just coming back above 30. Generally, when we see a stock’s RSI go from being under 30 and starting to break back above… that tells us it could catch a bounce soon.
Not only that, the company conducted a reverse stock split… and it could’ve experienced a short squeeze at the time.
Well, shortly after… the stock opened up a lot higher…
If you try using these patterns in large caps… they probably won’t work. However, the three chart patterns that I teach to all my clients do work well in small caps.
If you need a refresher on how I use these patterns, check out a more detailed presentation I made on this topic right here.
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