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Lessons Learned: Out Of Biostar, But Looking To Get Back In

Friday was Biostar Pharma's first day of trading on the NASDAQ, and predictably the stock ended up down on the day. There are lessons to be learned about event driven trading here, as this is a pattern that will repeat itself for the rest of your investing life.

BSPM is the second stock I've uncovered in the last 60 days to make the jump from the bulletin board to the NASDAQ, and in both instances I alerted you in plenty of time to make a great return. The lesson to learn- if you're going to bet on an "event", which is what I call "event driven trading", you have to remember to sell when the stock trades up around the event. 

Here's the most important component of skillful event driven trading- you must remember that event driven moves almost always happen prior to the event taking place. The actual event is the climax to the upside on the chart. Hence, the old Wall Street adages: "Buy on Mystery, Sell on History", or "Buy the Rumor, Sell the News".

Not all corporate events are widely expected, so occasionally you will see a company's stock shoot up on news. However, as always, the charts tell you what to expect. High volume and improving prices before an event nearly always lead to a pullback. Quiet trading with no upside movement prior to a major event means the market truly was surprised, and there could be more upside.

Here's the chart of China Recycling (NASDAQ: CREG). This was my first recommendation that made the jump from the Bulletin Board to NASDAQ. As you can see from the chart, market participants started to believe this company would make the jump in early February. 

The market for this stock begins improving markedly in early February. The stock was just over $3 at the time, and I first introduced it at $2.40 back in late October. CREG made the jump from the Bulletin Board to NASDAQ on March 22, and made it's all time high on huge volume within two trading days. By the time it made the jump, the majority of the gains had been notched as the market was buying the mystery.

Longer term, the jump to NASDAQ expands the institutional audience significantly, and is a major positive for the stock as the company starts delivering better numbers. Shorter term however, the stock has pulled back to the $4 level, and the volume has dried up considerably.

If you like CREG and their recurring revenue business model, now is the time to accumulate for the next volume surge. When it will happen I can't say. Perhaps next month when they release Q1 numbers, which I believe will be very strong. I believe CREG is likely an $8 number sometime later this year, and their recurring revenues will continue to grow for the next 10 years as they install more energy saving systems in China's factories.

Biostar Pharma (NASDAQ: BSPM) made the jump to NASDAQ last Friday. It's Deja Vu all over again, and lessons learned from CREG need to be acted upon. As I informed everyone last Thursday, I sold 1/2 my position when the NASDAQ listing approval was announced, and was looking to sell the other half when a post NASDAQ trading peak was reached.

On Friday- the first day of NASDAQ trading, the stock traded up to $5.50 for a nanosecond, then it was all downhill. I sold the other half of my position just over $5, and was very pleased to net about $1.40 on 14,000 shares in 30 days.

If you're still holding BSPM, you should either sell it, or view it as a long term investment without concern over where the stock goes in the short term. I am looking to buy the stock back. This time, I'll likely wait for my opportunity, then invest in 10,000 shares and hold them for the longer term.

To identify where I want to own the stock, I'm going back to my tried and true Fibonacci Retracement levels. I've inserted to Fib retracements on this chart, so it looks pretty busy. Here's what the chart is telling me. This stock is likely to pull back to at least the $4.36 level, and likely even further. 

The longer term retracement levels are on the left side. I believe the stock will become a buy somewhere between $4.10 and $4.36. Volume will play into my thinking as well. I'd like to see the volume dry up, which to me would indicate the "hot money" has come out of the stock, and the remaining shareholders are longer term thinkers.

In light of a likely $.55 to $.60 in EPS this year on about $80 million in revenues, I believe there's upside in this one to the $8 level as well.

Lesson learned. I once read he definition of insanity was doing the same thing over and over again, and expecting a different result. If you didn't sell CREG at the top and are a trader, perhaps you did it better on BSPM. Odds are there is further downside in BSPM in the short term, but longer term this one is going to be a Star again. 

In the meantime, I've identified at least 3 more situations that are destined to upgrade to NASDAQ. Stay tuned.

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