How to Trade Garbage Stocks for Fast 17% Gains

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Dec 14th, 2012 | By | Category: Investing Strategies, Trend Playbook

For centuries, the human race has been fascinated by the possibility of turning junk into gold. Not much has changed…

In medieval Europe, alchemists toiled away their lives trying to turn common lead into precious gold. It wasn’t a good investment for their backers, the European nobles who thought that alchemy was a good way to expand their house’s coffers. Today, when you hear about an opportunity to turn some piece of junk into cold hard cash, chances are you’ve got the same odds of success as the princes who backed the alchemists of yore.

But there is one place where you can truly turn junk into gains: I’m talking about trading stocks. Today, I’ll show you how…

I’m not a big fan of hypotheticals — they rarely hold up when real cash gets put on the table. That’s why I want to use real-world trades in today’s Trend Playbook. By now, you probably know that Greg Guenthner and I run STORM Signals, an elite trading research service that gives members actionable trading alerts. We’ve had some stellar success trading absolute junk stocks in the last month.

Just take First Solar (NASDAQ:FSLR). This stock has lost 87% of its value in the last five years, as solar lost favor with investors and the recession knocked scores of solar projects offline. But there was a textbook trade to be made here — just take a look at the chart:

FSLR was forming a textbook ascending triangle pattern with resistance at $26. The move above $26 was our buy signal for this trade…

Even though this stock isn’t a name that you’d want to own in your 401(k) right now, the technical pattern in shares made it a perfect short-term trade. And the fact that it’s a garbage stock only made it a better buy — that’s because this thing was so oversold back in June that buyers have been coming out of the woodwork to jump onboard FSLR. One that $26 upside barrier got taken out, we had a good indication that it would continue to run higher.

That’s the exact same situation we had just a couple weeks earlier with the trade in Research in Motion (NASDAQ:RIMM) that we alerted our STORM Signals readers to. It was a beaten-down garbage stock that was snapping back from oversold conditions with a well-defined technical price pattern.

Right now, that combination is a recipe for significant gains in stocks…

At the end of the day, we took 17% gains on our FSLR trade in just eight days. And we booked 30% on RIMM in 21 days. If that’s not garbage into gold, I don’t know what is. Even better, the fact that junk stocks are rallying hard right now tacks some confidence onto the bullish cash for stocks for 2013 that we’ve been telling you about. If the broad market starts another rally leg, investors should expect lots of similar buying opportunities to pop up.

(Since you already know how to spot bottoming stocks and pick your price targets, it’s just a matter of putting those tactics together for a solid trade.)

Alchemy may not be a fruitful endeavor, but trading alchemy can truly turn lead-riddled stocks into golden opportunities. Keep your eyes open for them this month…

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Author Image for Jonas Elmerraji

Jonas Elmerraji

Jonas Elmerraji, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes, and a contributor to Agora Financial’s Trend Playbook. Jonas got his start on the fundamental side of the market, poring over financial statements and valuations to find sound investments – today, he specializes in blending fundamental and technical analysis. Jonas is a senior contributor to TheStreet.com, and has been featured as an investment expert in Forbes, Investors Business Daily, and CNBC.com among others. 

Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

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