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How to Choose the WinnersUnderstanding Penny Stocks

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Leeds Analysis X - Technicals

Bottoming Out

This is almost the exact opposite of the topping out trend, except a stock can bottom for much longer. Former shareholders in the stock sold on the way down, and having been burned by it before are reluctant to get involved again. Buyers after a slide rarely get involved as aggressively as sellers after a rise, and so the bottoming pattern could take even as much as two or three months.

In many cases, you will see that the stock which bottoms out now tops out later. The stock which tops out now, usually bottoms out later.

Consolidation

Consolidations can happen at any point. They often appear after long run-ups, and they can even interrupt the current trend.

When the penny stock trades in a relatively flat range (ie- between $0.40 and $0.55) for weeks, or more usually months, this may be a consolidation pattern. The shareholders that are impatient or disenchanted with their investment are unloading, subduing the effect of the buyers just getting involved.

The longer the consolidation pattern the better. What you want is to see a good turnover in shareholders, with a major portion of the company being held by fresh investors.

You see, if most shareholders have just acquired their stock they are far less likely to turn around and sell. In addition, if most of the long-term shareholders have all exited their position, the upward trend that follows may be unbridled because there are few traders left to sell into the gains.

Check the daily volume for the period you feel may be a consolidation pattern. Add up the number of shares that traded hands the entire time of the pattern, then compare it with the total number of outstanding shares. If 25% to 50%, or even more of the existing shareholders are new, and the stock traded in a narrow range in that time, you may have found a consoldation pattern. If 80% or more of the outstanding shares have changed hands within a brief three or four month window, you can be very confident that it is a consolidation pattern.

Volume Considerations

In addition to its uses for each of the technical patterns described above, trading volume can also be an excellent technical indicator on its own. Current daily volume compared to previous daily volume levels from months or weeks ago can reveal increases and decreases in trading activity.

With increases in trading activity, unless it is a major sell-off for fundamental reasons, penny stocks usually benefit. They are exposed to higher interest, and the word is getting out about the company. No penny stock quadrupled in price without an accompanying increase in trading activity.

If volume is drying up, especially if it is approaching non-existent levels, you should be concerned. The underlying penny stock may have fallen out of favor with investors, and could see a slow attrition as current shareholders continue to sell into light buying interest.

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