Technical Analysis (TA) is an effective tool for predicting future share price movements. For example, when a ‘cup and handle’ pattern appears on a stock chart, it typically implies a spike in share prices is on the way. If shares fall below a technical support level, the stock probably has more downside ahead.
New York, NY -- (SBWIRE) -- 04/26/2013 -- The more trading volume behind any TA pattern, the more that pattern can be relied upon. While this makes TA very useful with Blue Chips and Large Cap stocks which are heavily traded, TA is generally much less reliable when used with thinly traded penny stocks. The majority of investors do not apply TA to most low-priced shares, and for the majority of those low-priced stocks, TA wouldn’t work anyway.
There are exceptions to every rule. Indeed some TA does work with penny stocks, even though most of it does not. By applying the TA which is actually effective with low-priced, thinly traded shares, you will be able to increase your successes and returns, and have an advantage that most investors do not enjoy.
Here are my five favorite TA indicators for use with thinly-traded penny stocks
1. Money Flow:
Since penny stocks are much smaller companies, they are susceptible to being driven higher or lower from even moderate flows of money. If millions of dollars are flowing out of the shares but that penny stock has not yet dropped in price, you can assume that there is a high likelihood of the stock sinking in the near term. Alternately, if Money Flow shows a significant increase of money moving into the shares in the last few weeks, but the stock has not yet risen in response, you can expect that penny stock to appreciate in value.
2. Moving Average (MA):
When a short term moving average crosses above a longer term moving average, it suggests a buying opportunity and implies an uptrend to come for the penny stock. My favorite MAs (which I have found to be most reliable with penny stocks) is the 9 day and 18 day moving average. When the 9 day MA crosses above the 18 day MA, it indicates a buying opportunity, while the reverse of this (the 9 day MA crossing below the 18 day MA) indicates sell.
3. On Balance Volume (OBV)
The OBV keeps a running total of shares traded each day. When the penny stock closes higher for the day, that day’s shares traded are added to the running OBV count. When the penny stock closes lower for the day, that day’s shares are subtracted from the running total.
When OBV is charted, you will find that it will behave almost exactly the same as the share price. The opportunity arises when the OBV has increased but the share price had not yet moved higher - since the stock will almost always mimic the OBV activity eventually, those shares should be expected to increase in value just as the OBV is displaying.
4. Trading Volume:
Moves in the price of a penny stock on lower-than-average volume can be ignored, while price moves on higher-than-average volume should be taken very seriously. Expect upward moves on very heavy volume to be sustained, until that trading activity slows. Once the volume starts to dry up, expect that the penny stock may see it’s shares start coming back down.
5. Support and Resistance Levels:
With penny stocks, it does not take a lot of buying to create a support level, and it does not take much selling to cause resistance. While most penny stocks do not have support or resistance levels, when they are present they are one of the most reliable TA patterns in penny stocks, and can lead to some of the greatest profits.
These five TA indicators can be very effective with penny stocks, and are my personal favorites with which I have enjoyed the most success. Even while low-priced and thinly-traded shares typically aren’t good candidates for TA, you will find the patterns mentioned above to be applicable to most penny stocks, and that they can be extremely reliable and profitable.