Why a $10 stock is way more valuble than a $100 stock
You always hear me talk about round numbers being natural points of resistance and support in the market.
Well, that isn’t just an Idea – you can look at a stock and watch the price bounce around these round numbers until it breaks through in one direction or the other.
The ‘big’ price points that everybody likes to think about are numbers like $100, and $50 and even increments of every $5 market between those two.
But there is one that people hardly ever pay attention to, as a matter of fact, it is even a bit of a ‘no-fly zone’ for a lot of traders, and that is EXACTLY why it can become so profitable to trade at this level.
For starters, the key level we are talking about is $10, it’s not much of a secret
If you’ve been watching my shows for any length of time then you may understand this is a critical price level for the market.
See a stock that drops from $10 to $9 is a stock that has fallen 10%, but a stock that falls from $9 to $8 has fallen 11.1%. Same $1 drop, but a bigger percentage return.
That’s important because a stock that drops from $10 down to $6 has an accelerating return. That works in your favor if you know how to take the trade!
That’s just the math working in your favor but because of this, there is a change in sentiment that comes along with this break into the aforementioned no-fly zone.
First, analysts, who used to tout the stock turn on it like a wife whose been cheated on.
Next come the downgrades, as the guys who used to love it, do everything they can to get ahead of the coming plunge.
Overweights become outright sells almost overnight.
The bottom drops out and institutions start dumping like crazy pushing the company even lower.
So in quick fashion, stocks like these can easily lose 20 to 30 percent once they cross the $10 price point.
Let’s take a quick look at a stock that we have traded 3 separate times in my Penny Nation service so you can see how powerful these stocks can actually be – in this case, we are talking about Marathon Digital Holdings INC (MARA).
We first opened a position on Marathon on December 5th, we had been watching this stock for weeks as it approached the under $10 range, and as you can see from the chart, it had bounced off that price twice before retesting a third time and finally breaking through and making it deeper into the danger zone.
We waited to see what the stock was going to do as the market loves to go from $10 down to $8 where it turns into a value stock and new buyers come in and drive the stock back up to $12.
For what it’s worth, this is a short-lived event, as at the $12 level there is a ton of selling pressure which makes quick work of bringing that price right back down.
I like to avoid this movement in the market – I’ll leave that work to Kenny and I’ll trade the longer trend.
By getting mixed up in the stock ahead of that noise the only thing you are going to see is a loss of time premium…
anyway, December rolled around and we bought at-the-money puts and rode the option for just two days to make a 53% profit on the first half of the trade – holding the second half for an additional nine days to reel in a whopping 124% profit.
That’s a pretty sweet trade if you ask me, but the next time we traded it was even better.
And you know I am short the market, I don’t trust the rally, and we have not hit a bottom yet – but for this trade, I had to hold my nose and go long and boy did this pay off huge.
We got in on the February 17th $5 calls back on January 9th, this gave us time to confirm the trend reversal which justified going long on MARA.
The timing couldn’t have been much better as we captured just shy of 300% gains in just 4 days.
With all of these profits and we never even have to worry about getting the rug pulled out from under us by Wall Street, big institutions, or even the whales and their algorithms.
To them, this stock is dead in the water meanwhile it is giving us profits hand over fist, all because the stock broke below $10…
It’s pretty magical when you learn to harness the power of a lesser-known trading indicator.
Why don’t you give it a shot for yourself by trying out the tools I’ve given you on the stocks on my ‘stocks under $10’ watchlist.
You can find that by clicking right here
February 07 2023