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Why-You-Need-to-Look-at-THIS-When-You’re-Trading

Why You Need to Look at THIS When You’re Trading

Yesterday we talked about the one thing that can move stocks faster than a speeding bullet.

Remember what it was?

(Hint: stock… catalysts!)

Just to recap: a stock catalyst is a development that has the potential to move the price of a stock.

Some examples of these catalysts are newsworthy events, world events, or company events. Any variety of these could change the direction of the stock.

Understanding what catalysts are and how they can benefit you is super important.

Let’s jump into the benefits today:

Benefits of Stock Catalysts

Why look to stock catalysts to when trading? Here are some of the reasons:

Spot trends early. One of the biggest benefits of stock catalysts is that if you catch them early, they can help you spot market trends before they happen. This isn’t a no-brainer. You have to think critically to figure out which stocks might be affected.

Predictable patterns. Once certain stock catalysts occur, patterns often follow.

A CEO stepping down can frequently yank the stock price down. A positive earnings report can often drive the stock price up. Nothing in the market is ever 100% guaranteed. But events like these occur enough to where they can be considered reliable patterns.

Support your technical research. As my students know very well, I rely most heavily on charts and technical analysis when choosing my trades.

However, looking at stock catalysts can help me determine the timing and decide when to make a move. I think they’re extremely important…

That said, you should never decide to trade solely based on a stock catalyst. You should always conduct technical research on every stock.

But a catalyst can help you build a case to trade a stock, pushing you into buy or sell territory. Technical research and stock catalysts work hand in hand when making trading decisions.

Identify anomalies. Stock catalysts can help you figure out if there’s an anomaly that’s altered the stock price in a way that breaks a pattern.

For example, if you look at a stock’s chart and see that three months ago it jumped up in price, that’s a cue to dig deeper. So maybe you look back and find that’s when they signed a new contract. You can probably assume that’s what moved the stock price.

That type of spike is an anomaly, so you can dismiss it when trying to identify a pattern because it’s unlikely to occur again.

Examples of Historic Stock Catalysts

To help you better understand the concepts detailed in this issue, here are some past stock catalysts and how they moved stock prices:

#1 Marijuana Legalization in Canada

When Canada legalized pot, it put many a stock’s price one toke over the line.

Characteristics of This Stock Catalyst

In 2018, Canada legalized marijuana, and this nationwide legalization was a defining and game-changing moment for the marijuana industry.

Companies dealing with the growing, distribution, and sale of marijuana were no longer in a legal grey area or only able to cater to individuals with medical cards. They instantly gained a much larger audience for their products.

But that’s not all. Finances were tricky before the legalization — now these companies could take out bank loans, allowing them to rev up production for a growing consumer base.

What was a niche industry was poised to boom into a multi-billion dollar industry.

Stocks began to shift even before the legalization was made official. The mere potential of legalization motivated savvy traders who saw the budding opportunities, including partnerships with alcohol companies and more.

Following the legalization, many stocks experienced insane growth. For example, Aurora Cannabis was trading at around $5 per share in August, then quickly rose to over $10 per share in anticipation of and directly following the official announcement of legalization.

#2 Starbucks CEO Steps Down

When Howard Schultz left Starbucks, the stock price went down faster than you can say “Frappuccino.”

Characteristics of This Stock Catalyst

Starbucks offers a fascinating example of how a CEO’s departure can affect a stock’s price.

In 2018, CEO Howard Schultz stepped down from his position at Starbucks. Shares fell drastically following the news.

Yep, this is a standard example of a common phenomenon: personnel changes can drive stock-price changes. What makes this particularly interesting, though, is that it was a common occurrence.

You see, Howard Schultz actually had two separate stints as CEO. According to MarketWatch, after his first resignation in 2000, shares fell as much as 28% in the seven weeks following the news.

The second time, it played out a little bit differently — but added up to a similar decline.

When Schultz bowed out in 2017, the decline in stock price was more incremental. First, he resigned as CEO and took the position of Chairman. A veteran of Microsoft and IBM took his place. This affected the stock price, but not massively.

When he stepped away from the company entirely, the news had its biggest impact, with shares declining sharply.

The stock eventually rebounded, but it’s a great example of how a notable C-suite departure can often move prices in the short term.

#3 Tesla CEO Smokes Pot

Puff, puff … pass? Elon Musk’s on-camera blaze scorched the company’s share price.

Characteristics of This Stock Catalyst

He smoked, and he appeared to inhale.

After Tesla CEO Musk was captured on camera smoking weed during a Joe Rogan interview, the stock plummeted.

Of course, there’s more to the story. This was just the straw that broke the camel’s back after a series of missteps on Musk’s part. That includes an unfortunate tweet about taking the company private, as well as a wave of resignations among company leaders.

Amid gossip about Musk’s potential drug problems and general pessimism about the company’s future, shares tanked. In record time, the stock that had traded for $370 or higher was now in the $250 range.

It was an alarmingly quick descent, and it took time for the stock price to rebound.

#4 Passage of the Farm Bill

Many traders saw the recent Farm Bill’s passage as the start of a CBD stock frenzy.

Characteristics of This Stock Catalyst

You could consider CBD the second wave of the pot-stock fever that hit in 2018 after Canada’s legalization.

In late 2018, a news event rocked the world of weed stocks: The U.S. passed the Farm Bill, legalizing industrial hemp, a common source for CBD.

CB-what? CBD, or cannabidiol, is derived from the marijuana plant.

But unlike THC (tetrahydrocannabinol — the psychoactive, get-high compound), CBD is non-psychoactive. It’s touted as a wonder cure, but because of its connection to marijuana, it’s mostly resided in a legal grey zone with a limited audience.

Once the bill passed, all eyes were on the CBD sector. In particular, traders were looking at existing operations, as they had an infrastructure in place and were primed for a huge surge in business.

With the potential of high-profile partnerships and much larger distribution channels, optimism was at an all-time high, and many CBD-related stocks saw big swells following the Farm Bill’s passing.

#5 MagneGas Reverse Stock Split

No splitting hairs about it: A reverse split tends to inspire pessimism and bring a stock’s price down.

Characteristics of This Stock Catalyst

If you’re not familiar, a company will implement a reverse stock split when its share price is very low. They reduce the number of shares available but raise the price per share.

It doesn’t change the value, but it’s generally seen as a bad sign for the stock.

Why? Because companies with poor performance are usually using reverse splits to minimize the risk of being delisted from an exchange due to the low price per share.

This isn’t always the case … Sometimes they do it to gain more respect in the market by increasing the share price. But the perception is generally negative, so reverse splits tend to drive stock prices down.

Here’s a recent example: MagneGas Applied Technology Solutions, Inc. performed a 1-20 reverse split of its stock.

Suddenly, shares trading for less than 25 cents were consolidated into shares of about $4.15.

By the end of the next trading day, shares were trading below $3, which just goes to show traders’ distrust in reverse splits.

Starting to make more sense now? I sure hope so.

I know we’ve covered a lot of ground over these last two issues, but I’ve got just a few more things to go over before we move on from stock catalysts.

Tomorrow, let’s touch on my top 3 tips to using stock catalysts to your advantage.

You’re almost there!

Regards,

— Tim Sykes
Editor, Penny Stock Millionaires

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Timothy Sykes

Tim Sykes is the editor of Tim Sykes’ Weekly Fortunes, a bi-weekly penny stock trader.

He also writes the free daily e-letter, Tim Sykes’ Penny Stock Millionaires

Tim’s most famous for turning the $12,415 dollars he received at his Bar Mitzvah into more than $1.65 million dollars in trading profits by college graduation.

In 2003,...

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