Video Synopsis

In this video: The penny stock market is moved more by sentiment and hype than actual fundamentals. This means that the stocks can be fickle and subject to wild price swings based on the level of excitement (or lack thereof) among buyers and sellers.

For Tim, this phenomenon equals an opportunity for panic dip buying, where he buys during a dip and sells when the stock recovers. In this video, he tells Matt how the pattern plays out and how he determines intelligent entry and exit points. 

Throughout the conversation, there are several key points highlighted. To further your trading education, you can also refer to your “30-Day Trading Starter Kit” guide. 

Once you’re ready, go ahead and proceed to the questions on the “Panic Dip Buy: Discover Tim’s Favorite Pattern: Questions for Review” area of the website. 

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

Enjoy the lesson! Understanding the mechanics of patterns like this has been a huge part of Tim’s trading success … Listen and learn.

Panic Dip Buy: Discover Tim’s Favorite Pattern

Matt Monaco: 

We’re officially at the halfway mark here, and we’re really starting to get into the patterns. I know this one personally is this one of Tim’s favorites — the panic dip buy pattern. 

He had a post on April 24, 2020, about how he called the best morning panic dip buy of the year. And here’s just the daily chart of DECN, which is the stock. Do you want to walk us up until that point and how you were able to call it just a full day of advance in a Trading Challenge webinar?

Tim Sykes:

I think it’s important not just to look at the morning panic itself, but the days leading up to the morning panic. 

Can you pull up like a five-day chart? Before this big crash from 50 cents to 20 cents on the right side. In the middle of the chart here, you can see that little blue signal that says low 16 cents. 

Right after that day, which I believe was Monday, is where you see that one morning spike on April 21. 

That morning spike was when they issued a press release saying that in two days, they’re going to have an event talking about more details of their coronavirus test. 

They’re basically putting out a future upcoming positive catalyst. But because they’re announcing it already two days in advance, this becomes a ‘buy the rumor, sell the news’ type situation.

Key Point: Look at the Catalyst and the Run Up

Not all news catalysts are created equal. For DECN, Tim focused on the company’s pre-announcing news. Why? Because this can be an indication that there’s a ‘buy the rumor, sell the news’ situation at play. Regardless of the catalyst, you need to know what it is. Not every panic is a good dip buying opportunity. Also, pay attention to the run up. 

I actually bought that initial spike from 20 cents to 23 cents. I made like $1,000*, where frankly it was a little disappointing. 

(*Please note: Tim’s results, as well as the other traders mentioned in this guide, are not typical. They’ve spent years developing exceptional skills and knowledge. Always remember trading is risky. Never risk more than you can afford.)

The very next day, it was actually better. Right there … It was actually better on day two, and that was leading up to the event. Then on day three of this pattern, the news didn’t come out right at the open. It kept spiking in anticipation of this news. It went from basically 35–37 cents all the way up to 50 cents. 

Right on that one big red candle … This is a 15-minute, can you change it to one-minute? This was pretty crazy right here, where the news came out. I don’t know if you can pull up the little alerts for news.

Mat Monaco:

Right there.

Tim Sykes:

You can see the news came out right there and the stock just didn’t react. This was right around 10:20 a.m. Eastern. The stock was already up so much.

So it became a ‘sell the news’ type situation. In my chat room, I was nailing it, saying, “Come on big panic.” And people were like, “What are you talking about? The news is good. Why would it panic?” 

Because the news was already pre-baked in when they pre-announced the news.

When a company pre-announces the news, the news had better be amazing. Otherwise, everyone’s already in it, and then it becomes a negative catalyst. 

Key Point: Pre-Announced News Is a Red Flag

According to Tim, when a company pre-announces news, it better live up to the hype — otherwise, it could be a negative catalyst causing a sell-off. 

And that’s what led to the sell-off. The reason why I wanted to pull up the one-minute chart is because, as I described it, the selling was merciless. In four minutes, the stock went from 50 cents down to 20 cents. This is a perfect morning panic. I profited on this. I made a little over $3,000.* You profited on this. How much did you make on this one?

Matt Monaco:

Only probably around $300.* I didn’t have that many shares.

Tim Sykes:

But that’s fine. You’re still in college. Again, whether you make $300 or $3,000. I know some people … Grittani made a $40,000+ profit* on this one. He was actually long into the news and he got caught a little bit after the news came out. 

I also know some people who made a few thousand dollars shorting it when the news came out.* But look at this bounce off of the lows. Recognizing that good news can lead to a panic, but then taking advantage because of that preparation. 

Hardly anybody else was prepared to see a stock drop from 50 cents to 21 cents in four minutes. I’ve seen this literally hundreds of times over the past 20+ years. Even if you’re not trading or profiting, if you’re just witnessing it and recognizing the velocity and how truly ferocious this sell-off is, you can recognize that the dip buy is there too.

Key Point: Panic Dip Buys: Preparation Is Key  

Panic can create fast moves in the market. For instance, it’s possible for a penny stock to lose half its value in less than 5 minutes. You need to recognize that even good news can create a panic. Tim’s favorite dip buys are fast and furious massive panics. 

What we were talking about in an earlier lesson … the Level 2 really put in a bottom. Even though the low was 21 cents, it never really got there on Level 2. There was a solid bottom of bidders at 22 cents. That’s where I bought, and there was a turn into Level 2. 

So when it went from 50 to 20 cents very quickly, there was going to be a base of buyers somewhere along the way. It happened in the low $0.20s. So I bought it in the low $0.20s, sold it in the high $0.20s, made my $3K.* It actually went all the way up to 37 cents. This is literally in 18 minutes, and you can make 60% on your money.

To put that in context, if you make 60% over three years in a mutual fund, that’s one of the top-performing mutual funds in the world. This is 60%, 67% on your money in about 20 minutes. Now, I’m not saying you have to catch the exact bottom or catch the exact top… 

I made really roughly 20% on this. But if you make 20%, 30%, 40%, 60% — this is the window of opportunity. And then it kind of becomes like a bouncing ball where it goes down a little, tries to bounce a little, but then it’s pretty irrelevant. I’m most interested in that initial crash and the bounce.

Matt Monaco:

How do you balance between getting in too early into the panic, and then also the opposite, which is hesitating, and then you end up missing the bottom?

Tim Sykes:

It’s tricky to try to catch a falling knife. If you go into the kitchen, bring out a steak knife, and try to catch it — you’re going to end up with bloody hands. I don’t suggest you do that. 

The same goes true with this. I didn’t know if the bottom was going to be 30, 20, or 10 cents. When there’s absolute panic, it creates a tsunami of sellers. The previous night, I actually gave a webinar to my Challenge students, and a lot of Challenge students were trying to think that the bottom was 30 cents. 

I was like, “Don’t say that the bottom is 30 cents. You have no idea where the bottom is.” As it turned out, if you bought in at 30 cents, you would have lost roughly 30% in a minute.

So you can’t go in with an expectation of knowing where the bottom is. You have to let the stock play out. You have to learn to react instead of predict. And like I said, around 22 cents is when the turn happened in the Level 2. The bidder solidified, and there was a wall of buyers. 

You can see that giant red candle of volume too, in that one minute, it traded six million shares. So you had max panic selling price-wise and also volume-wise. 

That’s usually a good indicator when a lot of people use a stop order. So if they’re in the stock and the stock is at 45 cents, and they’re like, “Well, I’m not going to be able to watch it every minute, so I’m just going to put my stop loss at 30, 35, or maybe even 40 cents.”

What happens? It doesn’t matter where you put your stop loss. That doesn’t guarantee that you’ll get that. So the stop losses are getting triggered at 40 cents, 35 cents, 30 cents, 25 cents. It creates this tsunami of sellers that pushed it all the way to 22 cents. 

Key Point: Stop Orders Are Dangerous (And … Don’t Try to Catch a Falling Knife)

Tim keeps mental stops but doesn’t actually put stops on his orders. When panic starts, it can take out stop losses fast. As a trader, you want to be able to get out. With stop-loss orders, it’s out of your control. 

At the same time, stop-loss orders getting taken out is good for dip buyers. It’s exactly what creates the best dip buying opportunities. But don’t try to guess the bottom. 

Even if you put your stop at 35 cents, by the time you get filled with your order, you might’ve sold it at 22 cents — the worst point. This is one of the reasons why I don’t use stops. I use mental stops because the market makers will just screw you.

Matt Monaco:

When you entered, what do you risk off of? That can be tricky too.

Tim Sykes:

For me, I’m looking for that first turn into Level 2, which I saw. But I didn’t know that I was picking the absolute bottom here. 

As it turned out I was, but I sold in the high $0.20s. You’re just never sure if the bounce is going to turn around. In another four minutes, what if it goes down to 10 cents? This happens so quickly, so I make snap judgments where I think that this it’s going to turn around. 

When the stock is down from 50 cents to 20 cents with good news, eventually you’re probably going to have some good dip buyers. So it’s a combination of logic along with Level 2 and a lot of experience. Like I said, I’ve seen hundreds of these, so I know what the price action looks like microsecond by microsecond.

This is why when I’m in a position or when I’m watching a stock, I’m only watching this one stock. I want to see every single trade. I want to be meticulous. 

Too many people, even if they’re watching a stock, they’re distracted, they’re watching seven other stocks. All my focus is on this. And my whole life for the past two-plus decades has been focused on patterns like these. 

In my early career, I used to short sell this. Like I said, there was a tsunami of sellers. That was fun to surf, right? As a short seller, with all the other sellers and if you’re already short, you’re just profiting. 

Now, after 20+ years of trading, and now 10+ years of teaching, I gravitated toward dip buying these. I think it’s a lot better for newer traders, it’s a lot easier. There’s money to be made both ways. So I encourage you to try short-selling or dip buying, try both.

Matt Monaco:

I think a hidden bonus lesson here too is the importance of trading these stocks, especially OTCs instead of investing in them. The day after this, DECN ended up getting halted by the SEC.

Tim Sykes:

That’s the thing, you can never believe in these companies. You can never believe in their technologies. You can never believe their press releases. You can never believe their management. Think the absolute worst. Think about the worst person in your life, the most evil person who lies, who’s just bad, who deserves to go to jail, who deserves to go to hell. That’s what these companies are, okay?

The good news is because you have that hopefully cynical approach, you’re not going to hold this stock overnight, first of all. 

This is a first red day pattern. So if you’re going to hold this overnight into the close, this was a potential short. I have several students who shorted this and now they’re going to bank when the stock reopens after being halted. The SEC cracks down, they can’t do all their sketchy stuff anymore.

Key Point: Penny Stock Companies Fail — So Trade But Don’t Invest

Penny stock companies are the worst of the worst. 99.99% eventually fail. Expect the worst and you’ll never be disappointed. 

Matt Monaco:

I think that wraps it up. You explained it really well. This doesn’t happen every day, but if you see it coming and you can be prepared like you said … you called it almost a full day in advance. These are huge opportunities.

Tim Sykes:

You want to focus on multi-day, multi-week winners. Those are going to offer the best potential crashes and the best potential bounces. You’ve got to think all the people who were shorting DECN — they’re going to buy to cover their shorts after a big crash. 

That’s how they take profits. Then you’re also going to have the cheap people who didn’t want to ride it on the way up. Now all of a sudden they get a 60% off sale. It’s like Black Friday for them, so they’re going to take advantage of that sale. So you have two groups of people, it’s in their own best interest to buy after a 60% drop. So that helps it too. It’s just logical.

Key Point: Focus on Multi-Day, Multi-Week Winners

Think of it like a rubber band. The more it stretches, the better the chance of it snapping back. So if you focus on multi-day winners, it’s like watching the tension build. The better the run, often the better the panic. Remember it’s not an exact science.

Matt Monaco:

Awesome. Yeah, I love this pattern. Thanks so much, and I think that’s another day in the books.

Tim Sykes:

Cool.