We mentioned in yesterday's edition the major indexes were due to snap back over the next couple of days and sure enough Apple (AAPL) provided tech investors with something to cheer about this morning. However, I wouldn't be so naïve to think that it was Apple's results that was solely responsible for today's pop. The markets on a short-term basis were grossly oversold, so Apple's numbers were very timely to provide at least a short-term relief rally that will likely set the stage for the market's next big move. What makes today's pop a little more interesting than your normal snap back in a down market is the size of the gap that likely caught amateur short-sellers on the wrong side this morning. Lesson here... if you're going to short something, do it on a snap back rally not at its lowest point. This is why we open put option positions on a rally rather than on a low, so if you stick with our recent theme, now would be the time to take a shot at some index put options, while the market is a little exuberant. Back to what I find interesting now... the size of this morning's gap up actually puts the NDX in a position to make a run for higher levels if it can muster enough interest. Another day or two of follow through would sure bode well for the bullish argument although my suspicions tell me this is just another head fake rally. Time will tell. It's important to remember to stick with a theme until proven otherwise. You're not going to be right every time, but if you stick to a trend trading theme, you're likely going to generate enough profits by the time the trend reverses course and finally proves you wrong. Let's see if NDX NDX makes a serious attempt to form a bottom between 2629 and 2711. It could take as much as a week, so there's still some opportunities to scalp some short-term profits off the index ETF's since the volatility will provide the necessary environment to do so. I Like a Penny Stock. Should I Invest or Trade It? We get this question a lot and since we pay close attention to what our Members have to say and want to know, we thought we'd provide our two cents on this topic for you today. We've been around small stocks for a long time now and there's no question that small stocks can provide absolutely ridiculous returns in a very short amount of time but there's also those select small stocks that can provide life changing returns if given some time. It's extremely important to understand what you're dealing with before you decide to jump into an idea head first. I typically break down small stocks into two general categories; highly speculative development stage ideas and fundamentally attractive ideas. Yes, you can make money in both but knowing what you're getting into is most definitely the key. I define highly speculative development stage ideas as stocks that appear to have either an incredible technology or very attractive business model concept, but have yet to realize proof of concept or realization of revenue and/or earnings. I define fundamentally attractive ideas as those stocks that are proving their concept, are having success in the market place and it's showing on their top and/or bottom line. It's pretty easy to differentiate between the two... all you have to do is look at the Company's most recent 10Q or 10K at the SEC's Company search interface here: http://www.sec.gov/edgar/searchedgar/companysearch.html. Look at their Statements of Operations and the picture will become pretty clear as to which category the stock fits in. Are they growing revenue? Are they improving their bottom line? Or, is there no revenue to speak of? Are they low on capital? Are they spending way too much to generate revenue? Although these are all very important questions, I'm not interested in giving anyone an accounting lesson here. The bottom line is by looking at a Company's recent financials, you should be able to find out pretty quickly which category the stock fits in. Why is this so important? Because it will give you a very good idea as to what you're strategy should be. Here's why... Let's assume I'm deciding to jump into a very speculative development stage idea. First, I'm going to make sure I like what the Company is planning to do and intends to do. I then put an emphasis on the chart. I want to see that the stock is starting to get a lot of attention or is going to start getting a lot of attention and that's usually reflected by signs of growing volume. Second, I want to be in early enough with some serious upside or I want to take a shot on a nice pullback. Once I've decided an entry, I'm going to keep a fairly short leash on my trade until the stock runs enough that I can give it some breathing room. Let's say I decided to jump into XYZ at $.80 cents. The stock goes to $.60 cents, I'm out. Let's say the stock goes to $1.50 from $.80 cents. Now I might take my profits and wait for a pullback so I can jump in again. Everyone's risk tolerance and financial situation is different so we're not going to tell you exactly when you should pull a trigger or not. The point here is speculative development stage ideas can be extremely profitable but don't get married to them until they've proven their model. Fundamentally attractive ideas, on the other hand, I'd play differently. These are stocks that are starting to or have been proving their model for a while. Fundamentally attractive ideas don't require quite the micro-management. If I like the fundamental growth opportunities of a particular stock, I peg my entry, set a stop loss I'm comfortable with and let it go. As long as the stock cooperates, I'm going to be patient and let my money work for me. Even if the stock doubles, I may not even do anything about it as long as I believe the Company is doing all of the right things. This is how you can create life changing returns. It can take months and even years, but for investors willing to exercise some patience with the right ideas, the returns can be crazy. This reminds me of a stock we covered years ago, Force Protection, ticker FRPT at the time. The Company was building armored vehicles at the beginning of the war. We started covering the stock at $.10 cents. Well, the Company actually starting selling these vehicles to the Government. Long story short? Over the next few years, the stock ended up on the NASDAQ and went to $40 bucks per share. I believe the Company has since been bought out by General Dynamics. The stock went from speculative development stage to fundamentally attractive. Once they started announcing orders and realizing revenue, it became an investing idea not a trading one. The last thing I want to make perfectly clear is don't hang on to something forever if it's going the wrong way. We're all optimists by nature so it's hard to let go of something even when the writing is on the wall. I still have shares of the bankrupt Global Crossing from 10 years ago still sitting in my account on purpose... to remind me never to hang on to a loser forever. Plan your trade and trade your plan. Hope you found this to be helpful in your efforts to maximize your returns when investing in small stocks.