Lotto plays are usually going to be a sort of breakout or beat down bottom play, but they have a couple characteristics that make them lottos, mainly absurdly high risk and reward. I like to think of them as “all or nothing” plays, kind of like a lotto ticket, where you’re either losing your entire investment or you’re hitting the big one. There is no official criteria for a play to be considered a lotto (other than high risk and reward), but I tend to think of most of them as being triple zero penny stocks / pink sheet stocks (.0001 – .0009), though they don’t always have to be.
Lottos often will have very low volume, where the plan is to buy when the stock is seemingly dead with the intention of selling it one day into strength and momentum. An example of a lotto success story would be EESO, where it ran from .0005 to a high of .05 in less than a month and a half. That is going to be the best case scenario, but if you hold out for the 100 bagger every time you’re going to miss out on smaller but still impressive runners. The key here is to sell in portions into the strength, locking in profits along the way, though still leaving some on the table to try and capture that next penny stock that makes it big.
Now to get more specific as to what to look for, I’m going to use one of my current lotto plays as an example. I’ll break it down as to what I like about the chart and why, and we can watch to see if it ends up flying to the moon or sinking like a stone. I’ll also preface it by saying this, the odds are that your lotto play will not work out for you. It’s just not that easy to find those elusive runners, but you won’t catch one if you don’t try and just one winner can make up for many losers. One thing to remember is to only use gambling money to play them. You wouldn’t go out and spend next month’s rent money on lotto tickets and you definitely shouldn’t do the same with lotto plays.
Now for starters, you’re going to need a stock screener which offers long term charts. EquityFeed’s charts (see my review here) only go back a year, so you’re going to need a program that goes back further than that. StockCharts.com’s free charts can go back up to 3 years, which is fine, but a paid subscription will allow you to go back much further. Nothing beats StockCharts.com as far as long term charts go, and their free service’s 3 year perspective should suffice in most cases. Typically 3 – 5 years worth of data is enough to see the big picture, though it won’t hurt to go back further. Also, when looking at longer term perspectives like this, I recommend switching over to weekly candles. Now that you’ve got the chart up and can see the action from the previous years, here are some things to look for:
-Bloodshed: I like to look for the stocks that have been mercilessly beaten down, often for multiple years in a row. It’s not uncommon for these plays to have gone through reverse splits, which are absolutely horrible to shareholders of penny stocks, and that results in many disgruntled bagholders. With sentiment so low, it’s going to result in nothing but sellers and very little buying, and market makers can and do use this to continually short the stock into nothingness. Bloodshed alone shouldn’t be a good enough reason to buy, since these selloffs can last for years and years thanks to poor sentiment, short sellers, and company backed dilution. You need to see a sign that things have changed for the better. The company itself doesn’t necessarily have to be turning things around, but you should see something in the chart that is hinting at it.
-Broken Downtrend: By looking at the past 3 – 5 years (or more), you can now easily see the bigger picture and draw some trendlines to add structure to the action. Start at the top and connect the tops of the candle bodies. This is an art and not a science, everyone’s trendlines may be a bit different and you may be able to draw multiple lines. The key is to identify what looks the most obvious to you and draw the line so it hits as many peaks as possible. In the link below of the example I used, you can see the two trend lines I drew, with the thicker one having multiple times it rejected the price. I drew an X to mark every time the price bounced off of that line. When you see that main trendline has been broken, that can often be an initial sign of things slowly but surely starting to turn back around.
-Moving Averages Stop Free Falling: Once again I’m referring to the long term weekly chart, and one moving average I like to use for this is the 50 week MA, which averages the closing price for the past 50 weeks. When this is free falling, you know the long term trend is pointing down. When it’s been declining sharply for years, you know the stock has been ruthlessly beat down for quite some time. When it finally stops it’s falling and starts to even out, that too (like the broken trendline) can be a sign that the selling has subsided and maybe even some accumulation has been taking place. The flattening of this moving average generally follows a long period of consolidation or sideways trading.
It has the attributes I just mentioned, starting with years worth of downtrending, selling, and reverse splits along the way. It has the major trendline identified with numerous rejections of the price trying to break through (and finally getting over it). It has the 50 week MA finally flattening out, and the price is now just a couple of ticks away from actually trading above it, which would enable the line to possibly start angling up. Finally, something I didn’t mention was volume. When you see these signs taking place, ideally you’d like to see bullish volume start to come in, especially if it’s taking place while the stock is fighting through resistance. In April of 09 you can see there was a huge volume spike, and though it wasn’t enough to break through the trendline, it did enable the price to move a step higher and get in a position to eventually break through. Without the heavy volume pushing the price up at this critical time, then there’s really no reason to believe the stock is close to reversing it’s trend.
Now all these things I mentioned are what I’d consider ideal, but a lotto play doesn’t have to look exactly like this. EESO for example didn’t fit this mold and another recent example, GOIG, didn’t either. Both of these did meet one criterion I mentioned, and that was the bloodshed that preceded their insane rallies, and possibly you could add the trendline break (depending on how you drew them). The moving averages never had a chance to flatten out, so the main difference between these two and what I hope plays out for MONA is the former were basically lotto bounce plays, whereas MONA would be considered a breakout lotto. The breakout lotto will form a long base from sideways trading (hence the 50 week MA flattening out) and you can then identify where the major resistance lies at. If you go back to the MONA chart, you’ll see I drew a red horizontal line at .0004, where 18 out of the past 19 months the price has stayed below it (very obvious resistance). A break of that resistance is where I’d put the trigger point on this play, meaning once that get’s broken I’d expect breakout players to start buying in. Timing the lotto bounce plays is much tougher than the breakout variation, but looking for long term support and reversal candles on the weekly chart is a good start, just remember the key to both of those varieties is the major downtrend and selling that kicks everything off. The only obvious exception I can think of are the setups where the stock is virtually dormant and there is little to no history of any sort of volume going into or out of the stock. In these cases you’re hoping that one day the stock wakes up and comes to life, most likely because of news or rumors.
Now as for the example I used, instead of using a stock that has already successfully proven to be a lotto winner, I decided to use one that’s in progress at the time of writing this. If it does end up turning into the next crazy runner of the penny world, then we get to witness firsthand one play out. In the more likely event that it fails to pan out as such, everyone can see for themselves just how risky lotto plays are, and how most of them end up. Like I said though, you’re not going to catch lighting in a bottle unless you try, but I wouldn’t recommend playing them with anything other than throwaway-money. One last aspect to mention is these types of plays will require patience. If I find a setup I like enough and have some extra cash I can afford to throw at it, then I do so and pretty much forget about it. I tend not to use stop losses on these plays, especially the real low triple zeros, instead I just throw as much as I’m willing to risk into them. Only throwing a small chunk of change at a trade may seem pointless, but tell that to the guy who put $500 into EESO at .0005, then cashed out in portions all the way up. This isn’t a method that I’d recommend basing all of your trading off of, but allocating a (very) small amount of your capital to lotto plays leaves you with the possibility of hitting the big one while not exposing you to much risk.