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Reverse Stock Split and Squeeze Case Study


Stocks are hoping to bounce back today after a two-day selloff. As the market remains fixated on trade talks, the strength of the global economy, and the Federal Reserve Bank.

And up until yesterday, it’s been a frustrating market to trade.

Now, success can be a double-edged sword.

It can sometimes make you cocky and careless. But it can also give you confidence when you have setbacks.

For example, my track record told me that I shouldn’t worry about going through rough trading patches because my strategies work… and the numbers will work out for themselves.

The key is to take action and not be shy when the right trade opportunity presents itself.

For example, an oversold “Split and Squeeze” pattern that I saw in HEB.

And just like that… I was back in the game… and back on the green team.

(Not all strategies and trades will work all the time… but if you have an edge… you take it… and let the numbers play themselves out.)

Most of yesterday’s gains came from the HEB trade.

(Want to watch the lesson? Join my service now)

That said, I want to walk you through this trade setup in HEB because this is one of those repeatable trades. I call it the “Split and Squeeze” and you’ll be surprised at how easy it is to learn… Read on to learn more…

Reverse Splits Can Squeeze Stocks


Patterns, value, and catalysts. Those are the three things I’m looking for in my trades… and this time it’s paid off. By just looking at three things in momentum stocks, I was able to lock in $12K on just one trade alone!

Millionaire Roadmap clients were able to see this trade in real time… and they even received text and email alerts about it.

Now, let’s get right into the case study and look at the thought process behind this trade.

HEB Case Study


The trade was pretty simple. I was looking at a clear fish hook – one of my money making patterns that I teach to Millionaire Roadmap (MRM) clients.

Here’s a look at the daily chart in Hemispherx BioPharma (HEB).


Basically, with this pattern… I’m looking for the stock to have a big drop… and it did. It was at $14 back in May (based on the adjusted split price).

Now, after it’s had a steep drop, I look for it to find a bottom and start to settle down, and it had some support right around the $4 level.

Thereafter, I’m looking for the stock to show signs of life and start to trade higher… which it did.

I found an area of value just above $5… and was looking to take profits anywhere between $6 – $7.

You’re probably wondering, Jason why the heck would this stock move 20%?

Well, the company recently announced a reverse stock split… and it’s very common with small caps because these companies need to raise capital, especially with biotechs.

With biotechs (the stock I traded is a biotech), they’re often spending a lot of money for research and development (R&D) purposes… and at some point, they’ll run through their cash.

Think about it this way, you have living expenses… if your overhead is more than you’re making at your job, you might have savings to dip into.

However, with publicly traded stocks, if they burn through all their cash… they can issue new shares and raise capital that way.

This is actually really important to understand.

When companies raise capital… they’re actually diluting their shares, which causes the stock price to drop… in order to combat that, we often see companies conduct a reverse stock split to try to combat that.

Stock Structure Matters With Momentum Stocks


You’re probably thinking, Jason, what does this have anything to do with the price action?

Well, if you go to Finviz, you’ll see that HEB has around 78.66M floating shares.


If you don’t already know, floating shares is the amount that’s available for us to trade.

Basically, the lower the floating shares… the faster a stock can move up.

Why?

Well, essentially, there’s not enough supply of the stock… and if there’s demand for it… what do you think happens?

You get crazy moves in stocks.

Now, with HEB… it already had a fairly low number of floating shares.

… and if it got any smaller… the stock could bounce and run higher.

There’s actually a pattern with stocks like these… they’ll often conduct a reverse stock split to be put in a good financial position, then announce good news… causing the stock to run even higher… then announce a secondary offering to raise capital, which dilutes the stock.

With a reverse stock split… the company is actually reducing the shares available to trade… the market cap of the company doesn’t change, but the share price and structure do.

HEB announced a 1-44 reverse stock split, which essentially brings down its floating shares to just under 2M floating… and brings its price up by a multiple of 44 – but the market capitalization doesn’t change here.

What that tells us is there is a low supply (our catalyst here)… and all that really needs to happen is just some buyers to step in, and it would cause the stock to sky rocket…

Here’s what happened after the stock split.


The stock got right to my target!

As you can see, when a company announces a reverse stock split you should keep an eye on it… and if you can pair it with a chart pattern like the fish hook, you can generate profits like these.


Again, with a reverse stock split, it reduces the supply of the stock… and when the demand for it comes in, the stock spikes. More times than not, when a company conducts a reverse stock split… traders might be predicting good news to come, and start to bid up the stock… causing in to run up.

So if you can figure the cycle of small caps and how they raise capital… you could ride the wave and lock in 10 – 20% winners quick.

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