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Posted 2 months, 8 days ago.

How I Broke My Rules And Lost Short Selling A Fraud, Cannon Exploration Inc (CNEX)

Tags: Breakouts, Fess Up Time, Hot Stocks, Patterns To Buy, Supernovas

Just about everyone and their mother understands Cannon Exploration Inc (CNEX) is a an outright fraud. Whether you look at PinkSheets.com displaying a skull and cross bones with the tagline “Caveat Emptor” next to its stock quote, its now $470 million marketcap (at $7.25 stock price), the blatant pumping by all the usual suspects and the fact that this company has no business of any kind and has now septupled (7x) in price in 5 days all due to a fluffy PR announcing a new website and a sketchy letter of intent to acquire a seemingly real business, no doubt in exchange for pumped up shares.

Knowing all that, you might understand why I shorted 600 shares yesterday at $6/share half expecting it to go higher—with the goal of averaging my cost basis up too—but never excluding the possibility of a quick $1-2 drop in price.

That’s all well and good, but as a PennyStocker, I have no excuse and my $760 loss (I just covered at $7.20), including commissions, is well deserved. Because while this company is scummier than most, it’s just the latest pump and dump that can—and often do—run further than anyone thinks possible so I still should’ve played by the rules I myself created! Rule #1, don’t short randomly strong penny stocks, you gotta wait for the price action to concur with your thesis. Usually it’s best to short into the market close of the first down day of a big runup, but sometimes that’s too late, so shorting in the afternoon when this kind of a stock goes from positive to negative often opens the door to a big afternoon dump.

I did neither—confident in my small position size and the fact that it was already late in the pattern, I excitedly jumped in. To be fair, it wasn’t total confidence, it was also fear that I might not be able to find any shares to short today (right on with that guess), so the only way to get in would be to get in early and risk some pain. Risking pain on ideal plays like this is something I’ve gotten very comfortable doing on these plays, but I keep forgetting that it’s simply not viable with TIM’s assets so tiny.

Today, I gave it time for the volume, and ideally the price, to fade—only the volume has, somewhat—but the bids have only been getting stronger and the ask, which successfully held $7.20 until noon, just gave way to $7.25. Now that 5 cent break could just mean the sellers will take a stand right now, or soon, but it opens the door to the possibility that this thing could surge biiiig, and quick, especially if it closes strong today, squeezing stubborn shorts, made worse given the stock’s illiquidity. And when I say big, I mean another 50 cents-$2 within minutes or hours.

Shorting these things isn’t as dangerous as most people think, but it’s safe only when the variables are aligned—like when there’s a major crack in support like VRML did the other day at $3.40. Right now that hasn’t happened so it’s not safe. While this is an obvious error on my part/setback for TIM, I controlled my losses, not risking a $1,000+ loss.

So please learn from my mistake, don’t just short frauds because they are frauds—hate all these stocks equally, but don’t let it get in the way of waiting for the right variables…frauds can and do go up faster because they catch early short sellers in a bind…it might sound ridiculous, but CNEX could see double digits on any short squeeze…I’ll keep trying to find shares to re-enter—as most of my biggest gains have come after my biggest losses—since these stocks fall hard, if not harder, on the way down.

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