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Leeds Analysis VI - Technicals

Collapse

The danger here lies in the fact that a collapse looks exactly like a dip. The difference is that the collapse is permanent. Often a collapse is brought on by fundamental factors, such as a law suit or a poor financial release.

In some cases, however, a penny stock has just been 'over reaching' its true value, and once the naive buyers get all their shares with no regard to the company's true value, and the buying dries up, there is nothing to help maintain the prices.

You should be able to avoid collapses by getting involved with fundamentally strong penny stocks. If the company is already bringing in earnings for an excellent P/E of 5.0, it is less likely that it will collapse and force the already strong valuations down to something absurdly attractive like 3.5.

(Note: I have seen this happen with a stock I owned, called Wheaton River Minerals. The P/E ratio was already very strong, then when the stock dipped it became ridiculous. I had patience, and eventually the shares more than quadrupled).

However, if what you thought was a fundamentally excellent company suddenly collapses and does not recover, you may be missing something.

Temporary Spike

I have seen this all the time, especially with biotech companies, and it is usually fueled by an FDA approval or an appearance at a convention. Sudden buying pressure sends the stock higher.

In almost all cases when the spike is fueled by speculation, it quickly deteriorates. Generally, a penny stock will see a significant gain on the first day of the spike, then lesser gains on each subsequent day, until you see profit taking (people selling at the newly inflated prices) that causes the stock to give up almost all of the previous rise.

If you are looking to make a quick profit on the underlying stock, this is an excellent exit opportunity.

Temporary spikes are often identified by surges in daily trading volume, which deteriorates in line with the momentum of the price rise.

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