What's up everyone? All right? So in this episode, I'm going to walk you through the reverse split setup. This is a setup that I've been aware of for a very long time and it's based on a stock that has very recently had a reverse split and then looking for that curl and squeeze back up. This generally is only a setup that you'll see on stocks that have pretty ugly daily charts. They've been beaten up for a long time, and some stocks have a history of doing multiple reverse splits.

and I'll talk about exactly what a reverse split is. But we'll just look at this chart here first, for instance. So this stock here did a reverse split on Friday The stock puts in probably the biggest green candle it's ever had. The previous reverse split was a few years ago back here, and the stock following that reverse split also, Uh, curled back up and made a pretty pretty big move relatively speaking for that time.

Uh, here's another one that just recently did a reverse split Dbgi and you can see this chart is like Horrendous. I Mean the stock has just been selling off and selling off. Uh, so you've got the yellow reverse split right there marked on the chart and it went up almost 300 percent following that split. Okay, so why do these charts look so terrible? Well, what happens when a company does an initial public offering? They sell shares onto the open market, right? So the reason they do that is because they want to take that money and reinvest in the company and help the company grow.

And all the shareholders that buy those shares. And of course, when they buy it, that money goes to the company. They get to benefit from the future growth. And so in a case of like a McDonald's a company that's able to grow just tremendously over decades, all the shareholders benefit from that growth.

But on the other hand, that's a success story. But what is very common in the market, especially with small companies, is that they'll do their IPO. They sell shares on the open market, and for whatever reason, they're not able to really generate substantial profits. This is very common with pharmaceutical companies, biotech companies that are working on research and development and they're hoping they come up with some invention or some new Uh medicine that is, Uh, you know they can sell to and then either the whole company gets bought out by like a Pfizer or whatever or that they can license and do really well on.

But during the whole R D phase, they're just burning cash, they're losing money. and so the people that invest in that type of company are people that believe in what they're doing. Okay, but after a couple of years of running the business and losing money, the share price will generally just be declining, declining, declining until it gets to a point where it's actually going below one dollar a share. and that's where reverse splits come in.

And to have your stock listed, your company listed on the NASDAQ or New York Stock Exchange there's a minimum listing requirement of maintaining one dollar a share as a minimum price. Now a stock can drop below a dollar a shares we'll sometimes see and they have a period of time to regain compliance and get their stock back up over a dollar. Now the the one way to do it of course would be to have that very successful drug come out or a great invention or to you know just have the business make more money. But short of that, the mechanism that they can do is a stock split.

and rather than a traditional stock split like what you may have seen with Apple or Tesla they do a reverse split. So in a traditional split if you're holding a thousand shares of Apple at 700 a share, so seven hundred dollars a share I'll just use this as a like a drawing board. 700 a share, uh times 1 000 shares 1K shares that would be seven hundred thousand dollars in the stock. So if Apple does a seven to one reverse split on the next day they'll the stock will open at a hundred dollars a share and you might think oh my goodness I'm down big and then you'll realize that your cost basis has gone from 700 down to 100.

so you now own at the same price. Well wait a second and you went from having one thousand shares to having seven thousand shares. So when a traditional split occurs, the number of shares outstanding goes up by the multiple of the split. All right, and the price goes down.

In a reverse split, it's the opposite. The price goes up in the number of shares goes down. So so inversely. if we have a 50 Cent stock and you own 10 000 shares of it at 50 cents on the next day, they do a ten to one split.

It's going to start trading at five dollars. Even right, Five dollars. Sorry my drawings. Not great.

Five dollars. And you're gonna realize you only hold 1 000 shares. So a reverse split effectively should not result in the stock just by itself going up or going down. It's just like it's almost like trading a hundred dollar bill for you know, 20s.

It's just a trade, that's really all it is. But uh, We've noticed a pattern and so the pattern is where the setup comes from. So here's the pattern. There's a lot of small cap companies that go into this cycle of doing reverse splits.

So the company initially IPOs it sells off, it sells off. it goes below a dollar. They do a ten to one reverse split and what might have been initially the number of shares outstanding. Let's say they sold during their IPO 10 million shares and they sold them at ten dollars a share and they raised 100 million dollars.

And that gave them five years of you know, cash flow. But now that cash is gone, they need to raise more money. So as the stock declines it goes down to a dollar a share. Let's just say uh yeah, let's just say a dollar share.

So now they do another reverse split ten to one. Okay so the next day the stock is going to be trading at ten dollars a share. but the number of shares outstanding goes down by the multiple of the split. So you go from a 10 million float to a 1 million float.

All right. Now the Stock's back at ten dollars. That's great. What would be really really good is if in the next couple of weeks the company puts out some good news because now Traders are going to recognize well this isn't a penny stock, it's a ten dollar stock.

It's coming off the lows right? It's moved back up here to 10 and so it's very common to see this cycle of reverse split. Some good news comes out and then a secondary offering the secondary offering. So good news comes out and then what happens is the company will start the the share price will start to move up as they're putting this good news out and into that volume into that liquidity they'll sell more shares. So now let's say let's say they're able to sell 10 million shares.

At 10 they're going to raise another 100 million in the secondary offering. So reverse splits and there's no I Mean listen, a lot of companies have shelf registrations and don't exercise them and don't do a secondary offering. A lot of companies have reverse splits and don't do a secondary offering afterwards. They're not always combined.

but we do see it a lot. So I have a few examples of, uh, this pattern that we've seen recently. So Dbgi is one of them. So this is a stock that does a reverse split right here.

And you know what's really interesting is it had a tremendous amount of volume before the split. That that always to me is a little bit of a red flag. I'm like what? What's with all this volume Before the split? It's a little weird. They do the split, the stock sells off a little bit and then it starts to squeeze back up.

And so between this day here with a low of about three below was 321. It goes up to a high of almost ten dollars a share. It's like 300 percent. That's a huge move.

200 it's It's a big move from three dollars up to ten bucks. and then what ends up happening is secondary offering. So let's see. and by the way, this is, um the second the reverse split setup I mean we've just seen this again and again again.

I Have a chapter of the my class uh Day trade strategies and scaling where I just show you all these examples of reverse split. So I'll just make this a little bit bigger. So this is another example. Reverse split stock goes from 6.37 up to 1968.

Another example here: reverse split and a squeeze up the next day Reverse split. Recent reverse split starts to move up. the next a couple weeks later goes from 4 to 26. another reverse split here from 4 to 60.

that was crazy. Another reverse split here almost same day. Crazy move. So one of the reasons that the stocks are able to put in such big green candles following the reverse split, you know it's because the float is is a fraction of what it was before.

So the supply demand equation has changed. The level of supply has decreased dramatically. So now if they put out some good news, even a little bit of demand medium amount of demand can create this imbalance. Where you see these 100 200, 300 moves in the stock and then that's when you have that big move and you've got that liquidity.

that's the opportunity to do a secondary offering. So on. Uh, Dbgi for instance. let's see.

Um. All right. So we'll look at Dbgi. So Dbgi, we have the Um, they announce uh, secondary offering and they had a shelf registration.

All right. So this was their shelf registration that gave them the right to sell shares on the open market. It would say how much money they uh, had given themselves the ability to to raise and the reason a company will file an S3 or a shelf registration is because they have to notify uh, shareholders of their ability or possible intention to do a secondary offering. Because when they do it, if it gets announced, it's diluting the value for all the other shareholders, right? If they originally had a 1 million share float and then they sell 10 million shares in a secondary offering, it's diluting your value big time.

So the S3 shelf registration? You can look at it and you can always check to see if a company has one. They're good for three years, so you'd have to look three years back from today's date to see whether or not they have one and it's valid. And then you could look in the filings to see whether or not they've tapped into it at all. and they can tap into it in multiple, uh, sort of increments.

This is, you know, 10 million dollars here. but the Shelf might have been for like 50 million or 100 million. Sometimes they're for huge amounts. Okay, so so let's look first.

Um, let's look back at a couple of more of these reverse splits and then we'll talk about. um, we'll talk about the secondary offerings. a little bit more detail. So there's another reverse split.

example. Um, this is a stock that has a reverse split. it sells off. It goes from about eight up to like fifteen dollars a share.

That's almost a hundred percent. and it was a very short period of time. So one of the things that I always encourage traders to be aware of are not just your intraday setups where you're buying and selling. Of course, you have to know about your pullbacks, your dip trades, your moving averages, your ABCD patterns things like that.

but you also have to be thinking about the daily setup of the stock. And so a daily setup could be a daily chart pattern. But then there's other characteristics that can increase the potential that the stock could make a bigger move. And I found that recent reverse splits in addition to recent IPOs Blue Sky setups SPAC mergers.

these are all the type of day of of I don't know it's a stock type so to speak That then any setup I see on it I'm a little bit more interested in or I think has a little bit more potential because of that sort of underlying Factor that's that surrounds the stock. So just the reverse split by itself. a stock announcing they're doing a reverse split to me, isn't enough to buy I'm not going to look at every stock that's announcing a reverse split and just blindly buy it because they're announcing a split. There's a lot of times, like in the case of Dbgi where they'll announce a split and then kind of nothing happens for a period or Worse the stock actually drops quite a bit.

It actually dropped following the split and I'm not really sure why exactly, but it sold off more after the split. Maybe there was some news out, so it's not strategy for me just to buy a stock that's doing a reverse split either before it or the day of or the day after. But when I sit down each morning and I'm looking at my scanners so you know my morning routine pretty much is I sit down pretty early and I check my Gap scanner. if I pull up one of these stocks, it's at the top of the Gap scanner and I see Oh, they have a reverse split.

you know, today or yesterday. Now all of a sudden I recognize that that stock has a little bit more potential. and of course, this one made a crazy move beyond what you'd normally see with a reverse split because of some other underlying factors that were involved in this particular stock. But in any case, when I see something like reverse split, it makes me think okay, this has a little bit more potential, perhaps.

but then the second part of it is the secondary offering. So in the last couple weeks, well, maybe last like month or so, we've seen a handful of stocks that have put out. uh, great news, right? They have great news in the morning and then either later that same day or the next day. Boom! They're tapping that shelf registration and they're doing a secondary offering.

And this feels super frustrating as a retail Trader Because as a retail Trader we're looking for volatility. We're looking for liquidity. We're looking for stocks that are moving quickly and so we have a stock that's squeezing up 15, 20, 30, 40, 50 percent. That's awesome.

If we end up getting one that goes up 100 or 200 percent, That's incredible. That doesn't happen, you know, every day, but it's crazy when it does. So then when later that same day or the next day, the company says, hey, we just raised 10 million dollars or whatever it is doing a secondary offering, it feels like a little bit of a slap in the face. It feels like retail Traders Like me, we we just bought right into it and there's different types of secondary offerings.

There's a secondary offering where they're using um, one of these big institutions uh, an Institutional firm trading firm to sell shares directly on the open market. And what's really interesting when this happens is that you we can sometimes visualize it and so what? I've noticed on I don't remember if it was DB So Dbgi uh did have that secondary offering. Uh, we can look at the five minute chart I can't recall if this was one of them. but one of the things that I've seen uh has been where you start to see what day was the offering.

We start to see this uh, these big sellers starting to line up on the ask and so is the stock is moving higher. We're seeing 150 200, 000 share sellers on the ask and you're like who is selling this many shares? Is it someone who got in right before the news came out? Maybe Is it someone who's trying to go short on the stock? Maybe Is it the company themselves selling shares directly onto the market? Maybe we don't really know. Until maybe later that day or the next day we see the news posted that they did a direct offering. Sometimes they're just one of the other scenarios, a big short seller or a long Trader or investor that's trying to unwind a position.

But one of the things that feels frustrating is that the you get this headline of really good news and then like right into that. as soon as you get the headline for good news, it's like right away they're already looking to raise money off of it and I feel like that's a little bit frustrating. So just as a retail Trader it feels like we you know just something that kind of keeps happening. So it happened on Dbgi, you know it sells off, has this big move and then secondary offering.

um we had. Let's see I think Icvx was one. Um so Icvx. This wasn't a review, a recent reverse split.

Um, this was just a stock that had definitely been beaten up. A lot was down quite a lot. And if we look at their filings, so this is Icvx Icvx, let's see, they've got shelf registration, right? So this is a company that's got shelf registration gives them the right to sell. For some reason this isn't loading properly.

I think it was 400 million dollars in stock. Let's see. Uh, 400 million dollars in common stock. Now when I saw this one squeezing up, I started to wander.

Hmm are we gonna see a secondary offering out of them? The Stock's just gone up from four dollars to 16. They have a shelf registration. Are we gonna see it? I Don't know. so you know you just kind of you're watching the news and you're just waiting to see one of these days.

Are we gonna see secondary offering price at the market or whatever it is. And one of the problems with these offerings is that if it's a direct offering, it'll be at the market. But if it's a if it's like a private placement where they do a deal with one of these big investment Banks then the Investment Bank wants a discount on the shares so they might be like well listen we'll give you five million dollars but we want the shares at a 40 discount of you know the close and so then the offering is announced and it's priced at you know five dollars a share when the stock was trading at twenty dollars a share. Now here's an example.

Uh let's look at Hudi. So hudi this is a stock that had it's a foreign stock so they've got an F3 which is uh same but it's for foreign. So uh, this is a Chinese company. F3 So they've got their shelf registration and this stock starts squeezing.

Kind of like crazy. It makes a huge move and it goes from like fifteen twenty dollars uh to an incredible uh, a hundred and eighty dollars a share. Let me back it up on this one. This was this was absolutely insane.

I Mean this chart's Bonkers It goes all the way up here to about 180 190 a share and then what ends up happening is on this day right here where you see it's all the way back down here. On that morning they put out news that they were doing a secondary offering and let's see it was priced at 25 a share and they announced it at a time the stock was trading at about 160.. So what do you think happened as soon as that news uh was was posted to the Pr. Boom! Instant instant drop in one candle drops from 120 dollars to forty dollars a share.

and as the day went on this thing went I Mean it literally had a high pre-market of I Don't know what the high was, but it had a PR It was trading pre-market at around 140 and dropped all the way to 16 a share. That is massive 90 loss uh, value in one day. So you know this is bearish because the most an investor was willing to pay them was 25 a share. Uh, let's see.

So this was the offering that they did. Registered direct offering right expected to close around November 9th consists of 1 million ordinary shares. This is the uh firm that's acting as the exclusive placement agent for this offering. So they're the ones are going to be finding the buyers and you know this ends up being just.

it's just crazy. The stock goes from 108 a share to 16 in in one day. Okay, so that was Dbgi. let's look at Tops I'll switch back to this here.

All right. So look at Tops Tops Tops. It's another stock that has an F3 shelf registration. It's a foreign company, all right.

So it looks like they're out of Greece Top Ships foreign company. They did a 13 million dollar um public offering right here. and let's look at this chart. You could probably guess around when the offering took place so reverse split right here showing on the chart this was.

This was actually a little bit of a funny one. Um, this whole chart is kind of a is kind of a mess. If we back this up it's going to take a second to load. Look at all these splits.

Split split split split. This is a company that has a history of doing this and it's if you adjust the price of the stock, look at, look at this. This is crazy. But they keep finding people that are willing to invest in the company.

I mean can you even imagine, look at how? look at how expensive? So let's just say this was back in 2016. in 2016 if you bought you know a hundred shares because of all the reverse splits because every time the the splits happen the price goes up. So then the historical chart goes up by that same ratio. So here I don't even have commas.

That's let's see. All right. So that's that's that would be five points. Oh I just lost it.

So right there would be 4.6 million a share. That's 24 million a share. That's 324 million dollars a share. That's crazy.

So the float on this one as of today, um let's see is certainly going to be lower We could. Let's see, it's a 10 million share float right now. So we've got 10 million shares outstanding as of today's day. So you know as of today's day.

Uh and and just recently we saw and I'll just auto adjust this here. I'm gonna have to take off my 200 moving average because it's breaking the chart. so we see how we got this big move right. we got that big move there up to 11.

it sells off, it comes back up and this was on December 2nd. See what was the day that they announced their offering. It was um, the 14th right here announces a public offering. So that was Uh, it was right after that candle.

It was right after this one. My mistake. It was right here right after this candle. So it sells off it pops up.

So on this day it had a low of a dollar, fifty and a high of let's see what was the range. It's a pretty. It was a pretty good range on that day. Well that was the day that we got.

The Um announces the pricing. Um, let's see there was some other transactions back here so that was tops. Another reverse split and then a secondary offering stock Oncs I think this was another one Oncs shelf registration. Let's see Um S3 is back here.

so it's about a year old but still valid, right? So that's a shelf registration for 100 million dollars. And then right here we've got the news that they priced uh 3.5 million dollar offering about 1.1 million shares at three dollars a share. Okay so now let's look at the chart that was on December 1st. So you have a reverse split.

few days later, the stock squeezes up. You have this really big move, it squeezes up here. ends up hitting a high of six dollars and fifty cents. It sells off, it comes back up.

Then we get the news of the secondary offering that was Oncs. we had Dbgi already looked at that tops. Uh, rnaz, let me check this one. So as a momentum Trader my goal is to look for volatility and liquidity I'm looking for stocks that are moving, but naturally I'm thinking about downside risk and I do not want to get married to any of these stocks I am just trading them and I think it's really important that you're thinking about your downside risk on these.

There's a recent shelf registration there on R and a z uh, this one. Let's see I don't know they've tapped it yet? No, not yet. at least not that I See, right there we had RNA this one put in a big move earlier in the week and I was wondering, um, whether or not we were going to see a, um, an announcement of an offering. So this stock goes from ten dollars up to 20 goes up 100.

Is it a recent reverse split? in this case? No, it's not. Uh, but they've got a shelf registration and here's the proposed offering up to 150 million dollars. So you know again, as a retail Trader There's a lot of risk for sure, whether you're long or short because one of the problems with people who are just you know shorting all these stocks and thinking they're just going to keep dropping, keep dropping is that you can have these periods where you have the squeeze where you have really high levels of short interest and stocks super beaten up and then all of a sudden over the course of a week it goes up 300, 400, 500, or a thousand percent. And so, unless you have been in for a long time, that's a spot where short sellers can get squeezed out.

And so you know, a lot of day. Traders and Retail Traders We're just kind of scraping the market for a little profit here, a little profit there, and these periods of volatility can certainly provide some really good opportunities. So just because it's true that a lot of reverse splits uh, will coincide with secondary offerings, and the stocks will decline over time for short periods of time for the sake of a day trade, these do present opportunities. It's just important to be aware of the risk.

And so one of the things that I'm thinking about, especially with these types of stocks, is exposure risk, which is the amount of time you're holding the stock because if you're holding it when the news drops of the offering, you don't want that to have to happen. And I've been super close. My closest one was actually this year I was I was in a trade within minutes I was in and out just taking a quick day trade. Excuse me within minutes of the secondary offering and I mean it dropped like a it's just so fast So I'm usually pretty good at being able to anticipate when there's going to be higher risk of a secondary offering.

usually. Day one, when the news first comes out and the stock is moving up, usually I'm okay. Day two, Day three: If there's not any more news but the stock is still going up, that's when I start to get a little bit nervous and there's some people out there You know that are really skeptical of these small cap companies and they they believe that the companies or people out there big investment banks are actually bidding the stock up almost to bait retail traders to buy into it. Knowing that they're going to do this offering Is that true I don't know that there's any actual proof of that I haven't seen any example that I would be like you know could could reference that that actually happened with that particular stock, you know, but it certainly seems I suppose I What lends itself to the possibility that maybe that has happened before are the fact that you know you see these stocks that have these big bids and they just keep moving higher.

Moving higher moving higher and it feels like there's a big Trader out there that's walking it up. Is that a short seller covering? Maybe? Is it someone buying who genuinely loves the stock and wants to buy a ton of shares? Maybe. Is it something else? Maybe you know, We don't know. There was that old um episode uh of the street where Jim Cramer was talking about hedge funds and how some hedge funds you know I don't know what point they would buy up stock they would.

They would basically take a certain amount of capital to bid up a stock knowing that that would bring in liquidity and then they would short into the liquidity with really big size so it's like they would. They would sort of bid it up to bait people into it and then walk it back down on the other side. which is you know I mean this is the type of stuff that unfortunately happens in the market and it it makes trading which is already difficult and risky. it makes it feel sometimes you can feel a bit defeated that wow there's there are so many elements of the market where it feels the cards are stacked against us as retail.

Traders Is there Is there any way that I'll ever be able to find any degree of success? And my feeling is that what's worked best for me of course has been focusing on these small little Windows where we do have volatility, where we have liquidity, and where I can get in and out and just trade the range and I do not hold in hope I Do not get married to these stocks and just become a bag holder holding forever I Always try to encourage people just and this is my Approach is I cut my losses I Let it go and I've had some big losses many of you have probably seen and on some of those losses, the stock did end up going back up. you know, days or weeks later and maybe if I just held it, the loss would have gone away. but there's been enough other times where the stock kept going lower so you can't really control how much you'll make, but you can to a certain extent control your downside and how much you're willing to lose. So when you're trading reverse split stocks and certainly stocks that have shelf registrations where you're concerned about the likelihood of a secondary offering, naturally, you want to mitigate the higher risk on that in some way.

Whether it's by trading for very short periods of time or smaller share size, whatever you feel is appropriate. I Sort of do a little bit of both personally. Um, but yeah, I you know. I Saw we had this move yesterday on Cosm, which was a reverse split, but you know this.

This one was just an example of an absolutely insane move where we had the split and the stock actually dropped about 98. lost 98, 97 98 of its value before rallying back up. This is a specific instance of what seemed like an oversight in the market making and broker dealer side of the business. The the reverse split took effect on the exchanges, but it wasn't that wasn't um, kind of, uh, propagated all the way through the market.

So unfortunately this created a bit of a anomaly of something. I haven't seen before. If you're interested in this particular example, I'll put a link at the end of this episode where you could check that out. but when you're talking about reverse splits in general, um, you know this is nothing new.

Some of these charts are going to be old. These are all examples of reverse splits, and you know recent IPO breakout is another interesting setup, but it's something that we see again and again and again. So I think it's good to be aware of it. It's good to educate yourself on it as always I Want you to remember that trading is risky.

My results are not typical, so you should make sure you trade cautiously and practice in a simulator before you put real money on the line. and don't try to blindly follow me or anyone else. right. Manage your risk.

So check out that episode on Cosm if you want to learn a little bit more about that specific example reverse split I Think you guys will enjoy it. And thanks as always for tuning in for this episode on reverse splits and secondary offerings.