MYM Nutraceuticals Inc MYMMF

RE:Anatomy of a Pump and Dump (And How To Profit From Them)

[Chemdog]

Chemdog wrote:

So what does a pump and dump look like?

I’ve seen a HEAP of pump and dumps throughout my time in the markets and I’ve unwittingly been a part of them many, many times.

A text book example is shown below in an annotated chart from one pump and dump I was personally caught out by in my early days. The company involved in Inca Minerals, a mineral exploration company searching for porphyry copper in Peru.

Porphyry copper deposits are hard to find, but are extremely lucrative – the largest copper mines in the world are porphyry’s. Speculation was rife that Inca had hit something big on their first drill hole, providing the ideal conditions for a pump.

The share price went parabolic, rising over 630% in the space of seven trading days. It then fell by up to 50% from it’s peak over the next few weeks as the “smart money” sold out for a hefty profit. They were able to sell into the demand created by average punters (“dumb” money) like myself who were continuing to buy into the hype while we waited with baited breath for the drill results.

The final capitulation selling seen by the huge “gap down” actually came as a result of the company announcing they had hit nothing in their first hole. Unfortunately I waited for results and was caught out by the big gap down. Lessons learned!

Example of a pump and dump where I lost money in during my early days of penny stock trading

What kind of stocks get pumped?

I think it’s also important to discuss the conditions that are necessary for a stock to be a candidate for a pump & dump. Without these conditions, it’s very unlikely that a stock will have the right “personality” to support a pump. There are four main “pump-worthy”conditions that I have come across:

1. A very small market capitalization. What constitutes “small” depends on what exchange you’re trading on. In Australia (where I do most of my trading) this mean less than $30 million, and often less than $10 million. In the US, this typically means any stocks with a market capitalization under $100 million and stock price under $5. Generally speaking, the lower the better.
2. Very little interest in the stock. This will be characterized by extremely low volume and is often synonymous with an aimless or sideways trend. This condition allows for the stock to be slowly accumulated at low levels over a period of time, prior to a pump.
3. The company must be in a “sexy sector” where speculation regarding a breakthrough announcement can result in significant “FOMO” buying. Common sectors include:
   • Technology – next generation microchip, the next viral app, anything internet or social media related etc.
   • Biotechnology – cancer drugs, cures for disease – anything drug related.
   • Mineral Resources – anyone drilling for the next “big deposit”.
   • Oil and Gas – It’s not called black gold for nothing.
   • Imminent news flow – the company must have some potentially “game changing” activity on the cards, with significant news flow likely in the coming months. Something like the start of a new drilling program at a highly prospective tenement, drug trials for a potentially game changing cancer treatment, or the launch of a new and exciting phone App.

Now that we know what a pump and dump looks like as well as the types of stocks that experience this kind of trading activity, it’s time to show you how I identify these stocks before the pump, so that I can get in early, make bank in quick time, and get out before the inevitable dump.