A similar move has also occurred recently on all the crappy small oil companies (they have yet to go bankrupt though, LINE, LNCO, UPL, DNR, CRC). They all drove lower, then as they consolidated and held lows, then subsequently broke out they had a clean directional multi-bagger move that went up until it stopped going up.
The general idea is that once the bankruptcy and delist occurs picking it up on the first down-move, adding on clean breakout should yield a solid multi-bagger (2-10). I have no certain explanation for why this occurs. However, plausible reasons are:
(1) Bankruptcy is already priced into the stock so when it occurs and gaps down all the shorts cover, all the funds who still hold are legally required to sell, and all the retail bagholders will never sell (they think of it as a lotto ticket, maybe gets bought out). So as the shorts covering meet the institutions selling, as that dries up the stock runs out of sellers and drives higher. The retail bagholders then buy more as they think it's finally getting bailed out.
(2) Once it becomes an OTC it is more easily manipulable, so a fund/MM picks up all the sales off bankruptcy news, drives it higher and then sells.
Reality is that it's probably a combination of the two reasons. but either way the reason doesn't matter.
Expected price action: Gaps down on delist and bankruptcy news. The low is likely set quite early in the piece, say first 3 days, as this is when funds need to sell, but that doesn't mean it can't retest the lows. It is around here that you want to be accumulating a position with the idea that you could lose about 50% of the position at this stage. This is the first step. It is very important to get in on dips here and provide liquidity. Chasing price action will not pay yet. As a very rough guide, in hindsight this will look like a horizontal consolidation phase, but at the time, will be ranging from like 10c-20c (for example).
Step 2: Be very weary of fake breakouts. The real one will be obvious and sustained, and you will not need to get in on first wave.
Step 3: Wait for the breakout of the consolidation range. An example of how this will occur, will be a consolidation range of 10-20c, with somewhat vague higher lows into 20c (and maybe even a prior fakeout above 20c), and it will drive higher over 20c and still be above 20c a few hours later. May need to pay up quite higher for the confirmation (say 30c), but because still getting in on day 1 it's worth it. This is part of the reason why establishing a position prior to breakout is important. At this stage a rough stop-loss is a hold below vwap (again, this is OTC land, so need to be prepared for fakes).
Step 4: Look to hold a lot of this for 3 day move. Manage accordingly, i.e. sell a lot into second day parabolic. Bear in mind that when the crunch comes it may be hard to sell, so want to make sure selling most into strength. For the remaining 1/3-1/5th want to hold on a time basis (3 days) rather than price, so that you give yourself a chance to catch a monster move.
Example: RJETQ
Can see the gap down off the bankruptcy/delist news. And here is the hourly since it got the Q and delist. Note that the delist occured March 8th, it traded on the Nasdaq for a week or so after the news.
While the trade may have worked, while it was still on the Nasdaq, didn't quite get the massive multi-bagger move that looking for. However, it can be seen that it never breached the low created in those first few days.
Going through the steps, this one traded pretty cleanly. Draw attention to the wee fakeout it had a few days after the delist became effective. Also draw attention to how clean the eventual break of the consolidation was when it finally came. Yes had to pay up 10-20c higher, but the break was super clean.
Another Example: ACIIQ: Can't get clean chart, so here's the Yahoo one, and Yahoo one zoomed in a little more.
In this case the importance of beginning to get long into the down-move is a little clearly. It was somewhat harder to add on the breakout. Breakout still very clean in hindsight though, and chasing the breakout (provided you know it's the "true one" paid off).
So how I plan to trade SUNEQ:
(1) Can hopefully accumulate some profits prior to bankruptcy by selling calls. Plan to assign quite a bit of risk, given conviction and consistency of the setup. If I get quite a bit of profit selling calls may increase risk assigned.
Will look to start long into weakness, risking around 50%, and risking $600, so will be a $1200 position total at this stage (roughly).
(2) Will hold this entire position through the volatility of 10-20c moves (near 100% moves off the lows). It will be stressful, but should be well worth it.
(3) On the day of the "clean breakout" I will look to add significant size, to bring my total risk up $600 from the current price. As an example, if the range post bankruptcy is 10-20c, and I have a $1200 position with 15c average, and I can trail stop-loss to 20c once clean breakout occurs, I will buy enough to make my total risk at 20c $600 (aka a massive add).
(4) Hold the massive position overnight, and piece out most of the adds into the second day push.
(5) Hold final position for another day, either close it out on day 3 failure (if it fails to hold green, or into the day 3 parabolic off the open).
Option is there after day 3 to flip short. If have had correct read throughout trading it, may be reasonable to risk a reasonable amount on the short (say 1/3 of profits).
