Video Synopsis

In this video: Tim schools Matt on the seven stages of one of his all-time favorite patterns: the supernova. 

This stock pattern plays out sort of like a supernova in space. First, it explodes, then it fizzles out. It provides opportunities for both long and short trades. And there are various entry and exit points for different approaches to potentially take advantage of the pattern.

The first step to trading a supernova is recognizing its typical arc. 

Throughout the conversation, you’ll see several key points highlighted. If you want to take the lesson even further, refer to your “30-Day Trading Starter Kit” guide. 

Then, once you’re ready, answer the questions on the “Penny Stock Framework: The Seven Stages of a Supernova: Questions for Review” area of the website. 

You’ll notice some market terms referenced — they’re highlighted in orange text. You can find the definitions in the “30-Day Trading Boot Camp Glossary.” 

This lesson gives an overview of the framework that Tim has traded for over 20 years. Pattern recognition is a huge part of his personal success trading penny stocks — listen up! 

Penny Stock Framework: The Seven Stages of a Supernova

Matt Monaco: 

All right, Tim. Today, I want to go over a big-picture overview of your strategy before we break it down into a bunch of different particular strategies. 

I think the best way to do that is to talk about your penny stock framework as a whole. And INO here is a pretty good example of it. So start us at the beginning and walk us through the whole thing.

Tim Sykes:

Sure. My pennystocking framework is a seven-step framework where penny stocks often tend to follow these seven steps pretty well. 

Key Point: Tim’s PennyStocking Framework Highlights a Very Common Pattern

No two stocks ever follow the same trajectory. But the similarities are uncanny. As Tim explains in this lesson, they often follow seven specific steps that he looks for.

It’s actually pretty crazy. #1 and #2 are where the stocks are up trending a little bit. And you can see here in the middle of the chart. Yeah. Like right there —

Matt Monaco:

Right there?

Tim Sykes:

No, in like February.

Matt Monaco:

Oh, OK. Yep.

Tim Sykes:

INO, just so you know, was in the right place at the right time — they make potential vaccines. We have the coronavirus, they might have the actual vaccine. We’ll see, but it’s uptrending a bit in February because they’re in the right sector. 

The beginning of March is when it really lights up and you can see here, this is like the third section from my framework where you have just a giant run-up. This is when a stock goes — what I like to call it — supernova.

You can say it goes parabolic. A stock that really hasn’t been able to bounce that big or spike that big in the past … all of a sudden the volume explodes. The short sellers are caught on the wrong side. They get squeezed. 

I was actually buying this in the $9s and selling it in the $10s  … I’m not great at higher-priced stocks. 

Tim Grittani bought it in the $9s and I think he sold it in the $15s or $16s. He made six figures.* I only made like $1,000 or so.*

(*Tim Sykes’ and Tim Grittani’s results, as well as the other traders mentioned, are not typical. Always remember trading is risky. Never risk more than you can afford.)

That’s the difference between me and Grittani on this one. And then he also shorted it. You could see that big red candle in the middle. This is the classic penny stock crash. That’s a #4 from my framework. And you can see a drop from a high of like $19 all the way down to the $5s in two days … That was a staggering drop.

That also leads to a #5. You can dip buy that big crash on that second red candle, or maybe on the first green day after the two big red days. 

So you have a dip buying opportunity. Then it bounces from basically the $5s all the way up to $12. And you can see that red candle, that’s a #6. Now it becomes a short selling opportunity. And it drops then from $12 down to $6. 

Pull up a new browser …  Type in “how to make $200,000 in a day by Timothy Sykes.” This is one of my blog posts on timothysykes.com. 

This is when Tim Grittani made over $200,000 in one day* trading Fannie Mae and Freddie Mac. In that blog post, you’ll see several charts. This is a good daily chart on INO, but I like bringing up the fact that there’s also a seven-step framework that you can apply intraday.

Key Point: The Penny Stock Framework Can Happen Intraday

Tim trades the most volatile stocks in the market. The original seven-step framework was used to teach students how to trade pump and dumps. The framework revealed itself over several days or weeks (as in the INO example.) But with penny stocks we often see the entire framework play out in a single day. Especially in volatile markets like we’ve seen in 2020. 

Look at those intraday charts. The first chart here is actually LTUM. This is a lithium company that has no bearing and it was several years before Fannie Mae, which is right under it. 

But this is the same kind of bouncing ball kind of pattern too where they both spike very nicely. These are one-minute candles. So for the first few minutes, actually for the first hour on LTUM, it’s nothing but green candles going up a penny at a time. 

On LTUM it goes from $1.10 to $1.90 and then crashes. This is intraday, mind you, from $1.90 down to like 70 cents per share. And then it bounces from 70 cents to $1.30. So it nearly doubles on that little bounce. Highlight that little bounce, if you see it.

That doesn’t look like much in the chart, but that’s a nearly 100% bounce. And then it goes a little lower and it gets a little bounce. But I’m just mostly interested in that first big drop, if I’m shorting a morning spike, or if I’m shorting a supernova. I’m looking to dip buy that bounce. Look at FNMI right under LTUM, highlight this bounce from basically $2 to $4 — this is a nice bounce. 

And also right under it, FMCC … same kind of thing, big drop. This one actually had like a little stutter step. It didn’t go straight red before that, but the bounce is the same. 

This is what I’m looking for, this extreme volatility. Either shorting into the morning run-up. All of these though, before they displayed this perfect bouncing ball pattern, had been running for several days.

This is like the peak volatility where you can be long overnight for the gap up. You can be long for that morning spike, but then you can also turn it around and go short. And on this blog post, Grittani made $200,000 in a day* because he was going long in the beginning and then going short.

So he’s trading the bouncing ball. And this is the kind of pattern I love seeing. 

INO is a daily chart or these are intraday charts, but it’s the same kind of philosophy where these stocks can really spike. They get ahead of themselves. Then they really crash. They get too low and then they bounce. Those three volatile type moves.

You can go long, go short, and then go long. It’s not an exact science, but it’s pretty reliable over 20+ years.

Matt Monaco:

Yeah. That’s pretty wild how similar these look.

Tim Sykes:

All of this is lithium versus Fannie Mae, which are totally different industries … the financial industry versus lithium. 

But what I want people to understand is that when penny stocks start displaying the same characteristics, their industries don’t matter anymore. Their companies, their products don’t matter. You’re specifically just trading the vehicle that’s the value of their company. 

The beautiful thing with penny stocks is that greed and fear and hype are all at their extreme levels when you see this kind of price action. So I love looking for this kind of pattern, and this is exactly what we see again and again. 

Key Point: The Framework Applies to All Types of Low-Priced Stocks 

As Tim demonstrates, this framework can apply to all sorts of different stocks, from the financial sector to raw materials and beyond. 

Pull up an intraday chart of DECN from just the other day before it got halted. DECN is a coronavirus-testing play. Go back to StocksToTrade for a sec.

Matt Monaco:

You’ve got it on your blog here too.

Tim Sykes:

We’ve got it right there too.

Matt Monaco:

Yeah. So there it is.

Tim Sykes:

Make this bigger. … You can’t really see the run-up that much, but this is from 40 cents to 50 cents in the first hour of trading. That’s still a 25% gain, not quite all green, but really a nice 20%, 25% run-up. 

Then you get the crash all inside of one to five minutes, it drops from 50 cents to 20 cents. Then you get the bounce from 20 cents to 37 cents. So nearly a double in the same kind of bouncing ball pattern. Literally find a ball and bounce it on your floor and you’ll see exactly how this peters out. 

DECN was halted the next day because they’re making some questionable comments about what their coronavirus test can do. But whether it’s a coronavirus test or a finance company like Fannie Mae and Freddie Mac or a lithium company, it doesn’t matter.

I’m looking for this price action. I’m looking for this pattern. This is why I always say to study hard, study the past. 

There are hundreds of examples of this exact chart pattern. Have you ever seen the movie “Pi” where the guy gives himself a lobotomy because he thinks he’s found a secret to the stock market? I just ruined the ending. It’s a terrible movie — I don’t watch it. But I don’t have to give myself a lobotomy. 

Key Point: This Pattern Repeats

Tim urges his traders to study the past. Part of the reason is that patterns like this repeat over and over, year after year. They may play out a little differently, but the general framework is very similar.

This is what I found works the best, this one pattern. And you can short it. I have several students … Kyle Williams was short DECN. I think he got in at 47 cents, covered at 27 cents, and made like $2,000.* 

Grittani was long from two previous days in the $0.20s and he sold in the $0.40s. 

Huddie was shorting it, I was dip buying it. So no matter what you want to do with this pattern, there are different angles for different personalities, but you’ve got to know this pattern. It happens quicker than anyone realizes.

Matt Monaco:

So to review, let’s take DECN here. This is like the end of #3, the third part, and then #4 is the crack. And then #5 down here is the dip buy and then #6, and then we go off into #7?

Tim Sykes:

#7 is the long kiss goodnight where I’m not really interested when it starts petering out. I mean, it would have paid to be short this overnight on the first red day, because then it gets halted. And by the time it reopens, it’s going to crash probably 80%, 90%. 

But the point is that I don’t really like shorting low-priced stocks. Even though this turned out to be a good shorter. That’s way too low. 

You never know where this stuff can go. So I wouldn’t short low-priced stocks specifically, but at the same time, that’s what the pattern suggests. I would have preferred this to be 10 times the price. 

It would have been nice if it dropped from, let’s say $5 to $2, then bounced to $3.70. And then I would have shorted it because the price would have been high enough. But shorting stocks under a dollar a share, especially as a newbie, is very risky.

Matt Monaco:

Do you have a favorite stage of the pattern?

Tim Sykes:

I used to be long overnight. But I could see as a teacher that some students hold too long and get a little confused. I also used to short looking for this kind of panic. But again, shorting is very tough. Not just for me, but for students too.

So lately I’ve been dip buying. I nailed this DECN — I made over $3000.* But more importantly, I called it the night before in a Challenge webinar. I called it on my watchlist. I called it in the chat room commentary. I called it during the crash. 

Very rarely will I ever call a stock so perfectly as this. It’s only because this fit my patterns to a T. It’s not that I know everything all the time. But when something comes into my wheelhouse like DECN and I’m prepared, that’s when I know what I’m doing the most.

Matt Monaco:

Awesome. Yeah, this is super cool. And the next couple of days, we’re really going to break down that framework from seven stages and kind of look at each stage individually and talk about the strategies around there. So thanks so much.

Tim Sykes:

Yeah. I thought that by teaching, I could crush these patterns because everyone would do it. And then theoretically, they wouldn’t work anymore, then I’d be free. It’s the gift and the curse. I’ve made millions of dollars on this pattern, but I’ve also had no life for 20+ years. 

I missed my college graduation for one of these charts. I’m thankful for it. I’m grateful, but at the same time, it’s also enslaved me … because I’m Jewish and greedy and I can’t say no to a high probability of money. 

But I’ve been teaching it now and I’m just making more money now because the patterns still exist and they don’t disappear. They’ll probably haunt me and enrich me for the rest of my life.

So I look forward to more people being haunted and getting rich and dealing with these small issues. Even though it’s not an issue, I’m kind of joking too.

Matt Monaco:

Yeah. It’s freaky how … I mean, DECN was last week and Fannie Mae and the LUTH, I think.

Tim Sykes:

LUTM, LUTM. Show some respect, come on. But those were years ago and it’s the same phenomenon caused by stop losses, caused by hype. Too much hype, too many stop losses.

It creates opportunity with this volatility and you have to be prepared. This is going to happen again and again. I don’t know if it’s going to happen tomorrow, next week, or next month, but it will happen, and too many people watching this will be unprepared.

Matt Monaco:

Well, let’s try and make them prepared a little more and we’ll be back tomorrow with some more details on these strategies.

Tim Sykes:

Yes.

Matt Monaco:

All right. See you tomorrow, man.

Tim Sykes:

Cool.