Pump and Dumps- They can be your enemy or your friend!

Where most people get burned on the penny stocks is what is called a "Pump and Dump". Everyday millions get stolen from hard working individuals that fall prey to it. Sometimes they come from a friend or colleague recommendation, or more likely by email or in the regular mail. These can look professional (and often are) and are telling you why "XYZ" is the GREATEST stock EVER. 

What Does Pump And Dump Mean?
A scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company's stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.

The victims of this scheme will often lose a considerable amount of their investment as the stock often falls back down after the process is complete.

I want to use a few examples, since I get TONS of emails that with about 10 minutes of due diligence I can pull apart as a Pump and Dump.

Ill also call out someone, just because its fun...

Eric Dickson from Breakaway Stocks is what we like to call a "Stock Promoter". Its no different than any other promoter, but if you think for one minute this guy actually believes in these companies than I got some Ocean front property in Vegas I am dying to sell you....

Is Eric a bad guy? Not necessarily. He might not be the one outright promoting but just riding the coat tails. But let me show you the problem about his picks (Sorry Eric,)
Lets start with this promo material: Stock Advisor

The best part is this promo material was over a year ago...11/12/09 to be exact....lets look how this has done since he said, and I quote...

"Just 36 months from now, you could be sitting on one of the biggest investment gains you'll ever see. The kind of killing most investors dream of making, but never do.

The stock is called GC China Turbine (GCHT), and while it may be low-priced at the moment, all that will likely change very shortly. This company is about to report its first profitable year (thanks to spectacular rise in sales), and is on track to grow its sales by 265% a year for the next three years at least. Very shortly, I expect the share price to begin a climb that could take it as high as 51X its current level."

All these stock promoters sound the same dont they? Im willing to bet Eric doesnt own 1 share of this pig today...lets look at what its done since he said it was a STRONG BUY at $2.50

On the bottom of the chart is the volume of shares trading. Notice during the "Pump" of November 2009 the volume was surging. The stock climbed and reached a high of around $4 before it broke sharply....some are a lot sharper than this and it was more gradual. Just means share holders were hanging on. Today it sits around .50 cents.Rather pathetic huh?  51x your money in 36 months? Yeah thanks Eric.

Bet he didnt tell anyone to sell ...and THATS the problem. Everyone will tell you to buy. Most of the time when guys are screaming BUY, they are selling free shares that the company gave them. They just need suckers to help create enough liquidity to sell to. You are just a way for them to make millions. 
What was the last line of the newsletter From Eric? 
"Let me stress. This may be a small company now, but in three years it could easily have a market cap of over $1 billion. It's the kind of opportunity that doesn't come along every day, and I really think you should take advantage of it. Contact your broker now, and if you're lucky enough to find GC China Turbine (GCHT) selling for under $5.50 a share, buy some quick!"
If your lucky enough???

Now how can a pump be useful ? You have a weapon here...we have short selling at our disposal! Eric stock picks are breaking sharper cause quite frankly, the short sellers are on to him...his last recommendation?
HHWW:

Notice you get a sharp break in the price ...all in one day. Now he was pounding his chest at around a $1.50 screaming its a buy...and then he takes credit for his stock pick going to $3.25, but neglected to tell you if you were not sitting by a computer and saw the break and got out immediately, you probably LOST money...dont worry, Im sure he got out. 
(I love the STREET SWEEPER take on this company BTW)

Since then he has also had another one FCPG...(he likes the china companies) This one was one that burned a lot...Spiked on the 9th of Dec. at over $5.60...yet it OPENED the next morning at just over $2.30, and dropped to under $1.50..ouch...

Here he is again screaming about his latest buy (or gift of free stocks and $800K to promote the company) of ... KNKT. This one being a non reporting company... (a PINK SHEET)
Eric Dickson is saying this could be his best ever, saying and I quote "Leaping from $1 to $52.92- GET IN NOW"... This company is a little .50 stock that began trading early December. First thing the company did is hire themselves a promoter and now we are over $1.20.

Given his track record, this is beautiful, cause I really like going short on this one. Its already had one "Crack" in its price dropping from $1.43 down to $.95 in one day, but then the pump resumed and its made its way to 1.21. Watch for a spike again in volume. Its been trading about 1MM shares lately, so if you are a few hours from closing bell and its over 1MM and trending down its primed for a snap. Timing is everything and its better to short late and get out before bottom than to miss the boat and have a short squeeze.

Its very tempting for a company like this to start dumping shares as well. This only adds to the panic. Right timing and you can make a killing here....

Now the one question I must answer.... "If he is pumping it, and I get in early, should I buy?"
Easy answer...nope. These types of pigs will nearly always break sharply. Its a much, much easier short.

Hope this helps you in understanding the Penny Stock markets....

For Honorable mention take a look at on of my older posts to short  COUGF on Street Sweeper.  Ive probably gotten 10 newsletters on it, another beautiful short.