There’s virtually no telling what the next meme stock will be. But that won’t stop people from trying.
Recently, it was obscure Chinese garment maker Addentax Group Corp. (ATXG). The company went public on August 31. It opened at $27 and closed at $656, a 13,000% gain in one day. Market cap peaked at $20 billion.
Now, it’s not unusual for a stock to soar on its IPO date. Tech stocks, especially, tend to deliver double- or triple-digit gains. But you don’t need me to tell you 13,000% is highly unusual.
On top of that, Addentax is as far from tech as you can get. The company sells garments to wholesalers. That’s not a high-profit business, and it’s an extremely competitive market. It’s certainly not worth $20 billion when it’s bringing in a breakeven revenue of $12 million this year.
More likely than not, this was a pump-and-dump scheme hatched on Reddit. And they didn’t wait long to take their profits. Traders rushed to sell the next day, and ATXG plunged 95%.
It’s impossible to predict with certainty when traders will rush into, and out of, these stocks.
But if you know where to look, there are clear signs when the frenzy is about to begin… and end.
Call Meme Stock Crashes With This
To spot the end of a meme stock boom, simply watch the Intraday Intensity Index (III).
This isn’t a popular indicator. But if meme traders followed it last month, they could’ve saved themselves a lot of money…
In late August of this year, Bed, Bath & Beyond (BBBY) soared after reports that GameStop Chairman Ryan Cohen was adding to his position in the company. Cohen owned more than 10% of outstanding shares. He added out-of-the-money calls.
Meme traders thought this was bullish, and bid the stock higher. A few days later, Cohen sold his shares and calls. According to CNBC, he made about $59 million.
The traders that followed him suffered losses. But they could have sidestepped the decline, if they’d simply looked at this chart:
Volume is in the center of the chart. The III is the purple line at the bottom.
Volume spiked when Cohen’s buys were announced — but III was already falling. That immediately tells us something’s not right.
The indicator measures money flow in and out of stocks. If III is falling as prices rise, it’s likely prices will soon fall.
After all, it takes buyers to push prices higher. When a stock runs out of buyers, a downturn is guaranteed.
Meme traders tend to ignore this reality. The madness of crowds and the ever-touted short squeeze are all they need to find the next GameStop, or AMC, or Addentax.
But you don’t have to.
The next time you hear about a meme stock surging some absurd amount in a single day, check the III. You may well find a legendary short opportunity that nobody else sees.
Another option is to check out what Andrew Keene’s been up to.
Andrew understands money flow better than just about anyone. When he traded on the floor of the Chicago Board Options Exchange, he saw how big buyers moved markets.
He soon realized this was the most dependable market force he’s ever seen, and developed his own indicators and scanners to weed out the big money.
His latest strategy weeds out some of the biggest money in the market — the traders making bets of $1 million or more at a time.
From April through July, trades based on these signals returned 139% — all betting on the upside, even as the S&P 500 fell over 15%.
Andrew’s about to open up access to this scanner for the first time ever. Spots are limited, but the waitlist just opened up.
Claim your spot here to have the best chance at getting in once the doors open.
Michael Carr, CMT, CFTe
Editor, True Options Masters