How to short penny stocks SAFELY?
We all know most of these trashy penny stock
companies are actually worthless and will
go down to zero.
But you cannot just short anything thats run
“up to much”.
Or else you run the risk of being short squeezed
and get margin called.
Yep, i’ve been there done that.
In the game of day trading penny stocks, timing
So in today’s video.
I will be going over the penny stock day 2
Going over the psychological reasoning behind
the set up, SSR, and how to properly enter
and set up your risk in order to short penny
on day 2 or day 3.
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In a buyer’s market where all the low float
penny stocks are going parabolic, its always
safer to short on day 2 or day 3.
Which brings us to the first criteria of this
short set up.
On the daily chart we must see a very clear
bullish extension candle to the upside with
above average volume.
This the daily chart on CEI.
You can see this is a very typical dilutive
chart for a penny stock.
This penny stock has done 3 1 for 25 reverse
splits in the last 2 years.
So as we can see on July 9 CEI ran up from
$2.50 at the open to a high of $9.50 near
the end of the day.
The stock has a low float of 2 million shares
float and it was just squeezing shorts all
If you look at this intraday chart on the
The stock is trending to the upside all day
All dips and consolidations were bought in.
The supply and demand was clearly skewed towards
the buying side.
This chart is a clear example of why you should
not short a strong low float stock on day
one in a buyer’s market.
Now we all know by now this stock closed strong
on the day.
But on day 2, is where the short set up came
During premarket the stock is slowly gapping
down from the the previous day close at $7.56.
It dipped down to a low of 5.80 premarket.
And thats the second criteria for this day
2 gap down short strategy.
The premarket trading price, has to have gapped
down significantly from its previous day close.
And why is that important?
Now we have to put our trader psychology hat
on and think about who’s trapped.
On day way the stock was squeezing shorts
all day long and attracting long traders.
The chart was clearly bullish everyone and
their grandma who has a robinhood trading
app is longing the stock.
So what do you think these traders will be
feeling when they woke up and see that not
only is their stock not going to the moon
like everyone on stocktwits and twitter is
saying, the stock actually looks like is starting
to sell off from its highs.
So all the buyers who bought in after $6 are
now under water.
And they are panicking and thinking, holy
I totally chased that chat room alert.
I was anticipating a gap up to 20 dollars
but now i’m down a dollar a share.
I should probably sell before the stock goes
back down where it came from at $2 the day
Remember, when a stock is overly bullish,
and the herd is biased towards one side, and
the common thesis fails to occur, the complete
opposite move tends to happen, and very violently.
In this case, $CEI, everyone who was in day
1 who held the stock was very bullish, and
their thesis was anticipating a gap up.
And when that expectation failed to happen.
The herd will panic all want to dump and get
out of the stock.
So that’s the psychological reasoning behind
this day 2 gap down short strategy.
And you as short seller, in this set up, is
taking advantage of the emotional selling
by the crowd, and mostly likely the insiders
of this penny stock company selling and diluting
their own shares.
For the gap down criteria #2.
I dont use a strict way of quantifying what
number counts as a good enough gap down for
me to consider it short.
So what I do to consider a pre market gap
down worth shorting, is simply pull up 10
min chart and see the gap down amount relative
to the previous day highs,
And if the gap down was only 20 cents or even
To me, thats not enough to cause an emotional
panic for me to shrot into.
Then thats not a good enough gap down short
set up for me.
Then i’d rather avoid, or wait.
So how exactly do we enter, exit and put our
risk for this penny stock day 2 short strategy.
There are 2 ways to enter.
The first way is… smashing that like button
if havent already.
If you get rich and buy 1 lambo is 10 years,
thats because you smashed that like button.
Also make sure to call me.
So to enter the day 2 gap down short.
You must pull up the daily chart and previous
days intraday chart and have the previous
support and resistance levels drawn out.
If you don’t know how to do that check out
There are two ways to start entering short.
The first way, is to scale in your first position
short when the stock opens and pops into the
major resistance levels you drawn out already
before you enter the trade.
In this case, this line 6.65 is the premarket
high on day 2 and also day 1 intraday support.
So i would start a position shorting into
any pop towards that level.
The risk, would be the previous day close
So thats already a dollar risk so make sure
to size accordingly and manage that risk.
But thats why this strategy needs that criteria
#1 of a clear over extension candle on the
Because that means the stock could potentially
give you a lot of reward to the downside.
And the reason I say start shorting any pop,
and not start shorting on that exact lines
Many times, the stock may just pop to 6.50
and not 6.67 in this case, and just start
Thats because… well, have you held a stock
long thats gapped down on day 2, i have done
that, and I remember just wanting to get the
hell out at any pop possible.
Think for the other traders, if the majority
of people are under water $1 /share this penny
stock, chances are, they’ll try to get out
on any pop and prevent losing even more.
Now if you’re too scared to short the pop.
then the second way to enter this short is
when the stock breaks the premarket low level
And the risk would be the reclaim of that
Not a pop into that level, but a reclaim,
meaning the stock is consolidating above that
And your potential profit target to the downside,
is at previous day major support level at
This is a safer place to enter than shorting
the pop at the open into resistance.
Because the stock has confirmed that it cannot
push higher and break the premarket level
on day 2.
And thats a sign that its game over for this
The second way to enter is safer, but it could
be harder to fill because of SSR, which stands
short sell restriction, also known as the
This restriction simply means that when a
stock is down 10% from previous day close,
short sellers can only open position on the
ask and not slam the bid.
So thats why a lot of times on SSR, you may
not be able to get the size you want short.
Also, There are cases where SSR can contribute
to a short squeeze and allow the stock to
go red to green on day 2.
Yes, that means this day 2 gap down short
strategy is not 100% guaranteed.
There are no strategy’s or set ups that
Anyone who claims that is trying to sell you
Its very important for me to present you guys
a realistic view of trading penny stocks.
Ill never call trading easy or any strategies
to be 100% guaranteed because this sh*t is
ELTK was that perfect gap down short setup
that caught all the shorts off guard.
You can see this stock gapped down to $6 from
previous day close at 7.
So its down a dollar a share premarket and
opened at 5.90’s which triggered SSR, short
now SSR is not a direct cause of a short squeeze
red to green move, because our last example
CEI had SSR but it didn’t squeeze.
But it could contribute to it, especially
when the stock like ELTK has such a low float
And thats why you must respect your stop at
either premarket high or previous day close.
If your stop line is hit, then stop out.
Otherwise you could be squeezed to 11 dollars
But i will say the key difference between
the gap down short set up on ELTK and CEI,
is the buying volume.
The buying volume on ELTK on the initial pop,
was comparable to its day 1 move.
So that’s significant.
While the CEI buying volume on that pop was
Doesn’t even show up on the 10 min chart.
So always use relative buying and selling
volume to guide you when shorting penny stocks
day 2 or day 3.
Don’t be that guy who just short anything
that’s “up to much”, especially if in
a buyer’s market.
We all know these penny stocks are going to
But in day trading, you could be fundamentally
right, but technically wrong.
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