Rafael Pereira runs a pyramid scheme on New Asia Energy and teaches an expensive lesson to the shortsFebruary 5, 2017: The idea of shorting penny stocks, especially those tickers undergoing a promotion, is an attractive strategy to many traders. The prevailing mindset is that all penny stocks are scams and all hyped stocks will eventually fall out of bed. Those traders who lie in wait for these situations look upon them as can't miss opportunities to profit from the losses that will be inevitably incurred by the majority of those investors who are attracted to pie in the sky dreams of easy money.
The truth, however, is that shorting penny stocks is utterly and completely stupid and potentially puts the trader at far more risk than the guy left holding the bag of worthless shares.
While the sentiments against intrinsic value in penny stocks may be correct, the concept of shorting penny stocks to make easy money is severely flawed. Yes, 99% of penny stocks are scams, or at least losing propositions. And yes, the share price of almost all hyped stocks will head towards zero as fast or even faster than they climbed. So why doesn't this create a set up for the perfect storm for those who chose to short these stocks? It's all in the risk.
When a trader goes long on a stock, he risks losing his entire investment. 100% of it. And of course that probability of such a risk is enhanced if the investment is a penny stock. The positive news here is that there is a limit to the potential loss.
However, when a stock is shorted, the risk is unlimited. "Well wait a second", one might protest, citing our acknowledgement that almost all, if not all, penny stocks are scams. If the stock is going to zero, how can the risk be unlimited?
It's all in what happens on ticker's path to zero.
There's an old adage that no stock, no matter how legitimate, goes up in a straight line. There will be hills and valleys in any chart, even if the general trend for the stock is upwards. Well the same logic can be applied to stocks going south. The course is not necessarily straight. And if the shorted stock has a low float, the result can be disastrous, as the unavailability of stock to cover the short amid margin calls can create a huge jump in the share price.
It's a dangerous game that has played out to great detriment several times over the past years. We just saw this scenario played out to perfection last week with Pro Trader Elite's pump of New Asia Energy, Inc. (
NAEI).
Pro Trader Elite sets out to defraudWe will start out by stating the fact that Rafael Pereira (if that is his real name), the publisher of Pro Trader Elite, set out to deliberately defraud the public with his promotion of
NAEI. This is indisputable.
On February 1st, Pro Trader Elite disseminated several hype emails, like the one on the right, over the course of just a few minutes.
This pump piece makes several statements that cannot be supported, for example, "...about to engage in funding to meet the growing demand of renewable energies in Asian markets. This is an entirely fabricated statement. "A company that shows this level of seriousness...". What seriousness? There has never been a press release announcing anything and the company has no operation whatsoever. "NAEI has technicals that show promise as well, with a float of just over 1M..." What "technicals"? The company barely traded before Wednesday. There are no "technicals". Pereira freely throws around meaningless jargon in hopes of conning the unsophisticated.
"NAEI's mission is to be a leader in the deployment of solutions and the implementation of projects..." Really? Gee, you would have thought that
NAEI would have done something...anything, if they had any sort of mission.
The fact is that
NAEI is an empty shell and Pro Trader Elite/Pereira are just plain liars.
So why did the
NAEI pump begat the short-lived, better than 10,000% gain in the share price? Because too many traders ignored that fact that the stock has a low float and shorted shares without considering whether there was a viable way out.
The short squeeze set upAlthough the company reports having 326,965,299 shares issued and outstanding,
according to OTCmarkets, as of April 15, 2016 there were only 1,009,177 shares in the float. Yes, that is a nine month old number, but since the stock rarely traded before Wednesday, it is logical to assume that this number was not much different at the launch of Wednesday's pump. Presumably then, anybody looking to buy stock was at the mercy of the shareholders. And by "anybody", we are referring to those potentially looking to cover short positions.
Until Wednesday,
NAEI was a ticker that traded by appointment, i.e. sporadically. The company has never issued a press release, and by its
own financials, has pretty much nothing in the way of assets or operations. In other words,
NAEI is a dormant company. It was the low float that made it ripe for a short squeeze. Once the stock had increased 1200% many figured that it was time to short shares in advance of the inevitable trip south. After all these pumps usually last only one day and the share price always goes back from whence it came. The problem is that there were too many shares shorted and no stock to buy to cover those shorts, Even Pereria was caught off guard, as he went back to pumping a compensated pick (
IMTL) on Thursday. It was not until Thursday afternoon when Rafael realized that he had created a short squeeze monster and he went on a chest pounding email rampage through Friday.
Those who shorted at the highs on Wednesday suffered through the of rising prices Thursday and into Friday thanks to a lack of shares available to cover their positions. Thursday saw shares quadruple as the squeeze went into full effect. On Friday, shares again tripled by noon, until shorts had mostly covered and
NAEI's share price instantly lost 65% of its value. Still, $900K worth of stock traded on Friday,
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Related: NAEI Past Performances
Pereira's modus operandiWhy does Pro Trader Elite/Pereira hype these type of stocks? It's not because he is being compensated for the hype, or at least there is no acknowledge of such compensation. Pereira's intent is to claim that he does have the ability to "pick""monster" winning trades, a plea he needs to make to attempt to slow the rate of attrition from his rapidly deteriorating subscriber base. With subscribers tired of being burdened with losses thanks to the daily hyping of compensated "picks", Rafael will use the rise in
NAEI as leverage in hopes that he can convince subscribers that the garbage he usually hypes for compensation has
NAEI-like potential. He is counting on the public's gullibility and inability to differentiate a low float dormant ticker from one designed to enable the dumping of insider stock. Pereira will boast about
NAEI's performance for several weeks while ignoring that the vast majority of his promoted tickers result in losses for his minions. In fact, the self-congratulatory emails have already begun to appear in Inboxes as Rafael sets up his dupes for the next compensated crap he is about to hype.
With this email, Rafael makes our point. He all but admits that the
NAEI scam was designed to create a better following for his newsletter. "Please share it with EVERYONE...", he begs. "This is the ONLY way I will keep delivering these INSANE play's [sic] is if EVERYONE here helps spread the word". Well yeah, he needs new suckers to fall for this crap.
No matter how Rafael attempts to convince the reader that his "pick" was timely, it was only his promotion that led to the run on
NAEI shares and the fact that lemmings are prepared to jump off the cliff on his say so. He is guilty of running a pyramid scheme.
It is a similar tactic that was employed when Pro Trader Elite pushed shares of
TLPC a week earlier, another dormant ticker with a low float. While that ticker also offered high percentage gains to a privileged few in the open minutes of trading, it did not experience the short squeeze suffered by those who sold
NAEI shares that they did not own. Still, Rafael boasted about that ticker's performance for several days. The public may buy into the scheme for a while, but it will abandon Pro Trader Elite much like it deserted Stock Mister before it, which necessitated the need for Pereria to go dark for several months and retool under the Pro Trader Elite banner.
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Related: StockMister's Pump of BCHS Creates Millions in Losses
Looking at
NAEI trades over the last three months, it is also evident that the stock was front loaded in anticipation of last week's pump. More shares traded in January than in all of 2016. Somebody in the know, likely Pereira or his cohorts, made a lot of money, illegally.
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NAEI trades since November 2016
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So what have we learned?
Shorting penny stocks is a tremendous risk. While there are many opportunities to profit from such strategies, it only takes one
NAEI to ruin your entire portfolio. When one goes long on a penny stock, the risk is limited to 100% of the investment while in theory, there is no limit to the ability to profit. Shorting however, offers only 100% maximum return--assuming the share price goes to zero--but the risk to the downside is limitless. Anybody that shorted
NAEI on Wednesday or Thursday learned that lesson and then some. The risk is greatly magnified when one attempts to short a ticker with a low float.
The increase in the
NAEI's share price can be attributed in small part to buying generated by Pereira's hype, but the lion's share of the increase is a direct result of the negligent short selling by shortsighted profiteers.
Finally, Pro Trader Elite/Rafael Pereira is a treacherous promoter that will expose subscribers to great risk. There was nothing about the demographics of
NAEI that led to the rise in the share price. The company is valueless and without an operation. This was a pyramid scheme that was successfully conceived and guided by a crook and aided by those who recognized that crookedness was abound but let their carelessness catch them in a short squeeze.
Note to Rafael Pereira: Phil Kueber, Greg Mulholland and Robert Bandfield are currently in prison or awaiting sentencing for carrying out a similar scheme on
CYNK. Be careful. You never know who will be knocking on your door next.
