Benefits and Limitations
Technical Analysis is essential for investment success. The purpose of such analysis is to determine a price that seems right to buy or sell after all study is complete. Predicting price movement is the purpose of Technical Analysis.
Charts of the
• stock market,
• sector of stocks you are interested in,
• your target stock
reveal the volume of trading, price, trade activity, and history of such financial vehicles.
Sector of Stocks - price and trading action
You want to check to see how your target stock's price action is affected by the sector of stocks it trades in. It may be that a new sector trend is developing after a long term cycle of little activity, and so may likely affect your stock soon.
In your search for high potential penny stocks, you will want to search and study the cycles or long term trends of various sectors of stocks. You want to find a sector of stocks that is nearing the end of a cycle of an incredibly low investor interest.
For example, when the economy is doing really well, gold stocks trade far lower and stays low until the economy shows signs of instability. Gold then become a fad stock. Every sector of stocks have there cycles of ups end downs that can last for years.
Economy and Cyclic Share Prices in Key Sectors
Most sectors of penny stocks go through cycles of highs and lows that may last a few years or more. Much of this has to do with the economy.
In bad economic times, the fad stocks trading high are precious metals, mining stocks, oil, green energy, perhaps weapons. So that is where the investor interest and money will be.
In good economic times, these same types of stocks will be dumped and technology stocks unrelated to precious metals will become the next explosive sector.
Pay attention to Stock Market Charts
You want to keep an eye on the entire stock market price and trading action. If the economy is picking up, or slowing down, this will be reflected in the stock market charts.
Such information should warn the penny stock investor that investment capital is likely to dry up in a recession, and to keep that in mind as you seek out exploration and developmental penny stocks, especially technology stocks.
Why so? Because exploration and developmental penny stocks are highly dependent on financing, since hardly any such penny stocks make a profit.
The one exploration and developmental stock that will always benefit in a bad economic times are the precious metal sectors. The motive here is to own any kind of stock that is perceived as a hedge for the collapsing dollar or possible demise of the dollar.
In times of war or political tension, even if the economy is bad, those exploration or developmental stocks dealing with weapons and the military will be perceived as having high value and will become fads as traders flock to those stocks.
All such technical information is reviewed and used to help accurately predict the right trends for trading before they happen.
Charts - technical indicators
You can even program the charts to display various technical indicators for various periods of time quite easily and quickly.
Technical Indicators relay important technical data in different ways. Such indicators, along with chart patterns, help a trader see potential trend changes; and thus, trade opportunities.
With the click of your mouse you can display a variety of helpful technical indicators within the chart or below it. To get a better understanding of the types of indicators and what they are used for, check out: Investopedia - technical indicators
Technical Indicators and patterns will be described a little more later.
Where to find good free charts. . .
Free Charts and stock screening software that are quite good are from your brokerage website or from:
and many other similar financial websites.
On these free investment sites, you can enter a ticker symbol of most US stocks and even many foreign stocks. After doing so, a technical chart, delayed or real-time quotes, and categories of fundamental data, are displayed for the stock.
The stock screening programs will allow you to choose the sector of stocks, price range and many other categories as you search for stocks you are looking trade.
Technical Analysis and Chart parameters
You can alter the parameters of how the chart is displayed in a variety of ways.
For instance, the stock chart can be displayed for price and volume activity within the day, or within a few days, to a few months and up to many years - or have some/all such data displayed combined on one chart, or have such charts displayed side by side.
You can pretty much tell how long a company has been trading (unless the stock's ticker symbol was changed) by looking up its historical trade activity.
Yes, technical indicators can be easily displayed on such free financial charts. Just plug in what you desire.
By viewing a stock's activity on a chart, an investor can easily picture the
• actual buy and sell prices and the corresponding chart of such activity currently and historically
• volume of buying and selling activity
• various technical indicators and chart patterns
Once again, with a click of your mouse you can select to view this technical chart for the day and up to many years.
Combining Technical data and Fundamental data
On google.com/finance alphabetical letters are added inside the chart, on particular dates and at certain points of the price line on the chart . . .
These letters indicate important news releases for that period of time where the letter appears on the price line of the chart.
If you then look up the letter to the corresponding news release, you can actually see how various news affects the share prices, if at all, at that time.
Such combining of data from the schools of technical analysis with fundamental analysis on these charts helps better predict price and trade activity for types of news releases on your target stock. Good technical analysis must include some study of the fundamentals affecting a company - like news releases.
If you are trading penny stocks and, in particular, potential rocket stocks, then complete fundamental analysis is essential along with basic technical analysis. All this is explained on this site.
On the same site, google.com/finance, you can also easily see on the chart if and when the shares of a stock have split, how many times, and whether the split was a reverse split or not, and the ratio of the stock split.
About reverse stock splits and technical analysis. . .
If the shares of a penny stock are split at all, then it's most likely a reverse stock split. I don't know of any good reason why an investor wants to be caught holding onto shares of a stock just before or when the stock reverse splits, because those shares almost always trade down in value over a short time after such splits.
Reverse stock splits are not always bad. The quality of the stock, its intellectual property, its products in development, financing, and its management have a lot to do with it. Also, if only one stock split has occurred in the history of the stock, that is a positive.
More than 1 reverse split of shares of a company's stock is usually not a good sign for the company (mostly penny stock companies) or for the investor.
Since reverse stock splits most times negatively affect a stock's price over time, then including stock splits in your technical analysis is quite important. You don't want to be caught holding shares of stock that are about to reverse split its shares.
Some stocks reverse split many times and at different ratios.
For instance: a 1 for 2 stock split means that for every two shares you hold, you now have only one.
Some stocks reverse split at huge ratios like 1 for 42, or 42 to 1. This means you get only one share of the stock for 42 shares you owned. This is an example of what could happen.
Numerous stock splits often associated with buyout strategies.
Numerous stock splits usually occur with those penny stock companies that feel they will be successful by buying up other struggling penny stock companies. That kind of strategy rarely works.
In those cases where it does work, those buyouts are strategically planned to ad special attributes that compliment the buyer's operations.
If the penny stock company is not successful in managing what it already has, then buying up other struggling companies is not going to make it any more successful.
Consider such evidence to base your decisions on.
My advice to you is: Use extreme caution when considering to invest in any stock that has a history of more than one reverse stock split. Also read the stockholder agreement to learn what, if any, reverse stock split agreement is in place and at what ratio.
Normal Stock Splits (forward type) - suspicious for penny stocks
When doing a good technical analysis of a penny stock, watch for normal (forward type) stock splits too, which is unusual. . .
Some penny stock scam artists take on the position of high ranking management of a penny stock company. Such scam artists play a really terrible pump and dump trick on its share holders.
They first buy up shares of their own company at low prices. Then they keep buying more shares just as prices begin to rise on its own marketeer promotion in the form of professional looking news releases.
After that, the scam artist will intensify its marketing campaign with "too-good-to-be-true" marketeer created news releases. The purpose of the news releases is to cause a buying frenzy by shareholders and other penny stock traders. This is the "PUMP" of a Pump and Dump campaign.
Many stock traders and investors take this as a good sign when the company execs buy up shares on the heels of exciting news releases.
Many times this is good news if quality stocks are involved, because it shows confidence of company execs to invest their money into their own company.
However, in the case to marketeers promoting a dud stock, its very bad and most traders will not be aware of the scam in progress until it's too late.
The stock's share prices rise faster than ever based on all the company buying and news releases. That is when the scam artist does a stock split, giving each shareholder 2 or more shares for every share owned.
This is an unusual split for a penny stock company that is not even making a profit and and no sales. In this type of stock split, share values will temporarily drop to compensate for the increase in the number of shares.
The company execs buy tons more shares at slightly premium prices over the drop bottom share prices after the forward stock split.
Unfortunately, most stock traders will be very thankful for receiving more shares of stock for free.
As well, such share holders will take this unusual stock split as a really good sign that this penny stock company is really top quality with great potential.
Then when they combine this idea with the fact that company execs are buying more shares and that too-good-to-be-true news releases are coming out, they think they are blessed to be in on such a good stock.
Share holders and many other stock traders, who are now watching the stock intently for more exciting news, take notice of the quick bounce back up of share prices after the forward stock split. They see all the positive technical and marketeer created fundamental data.
Such traders also become aware of more buying activity by company execs.
Another huge feeding frenzy occurs by penny stock traders who don't want to lose out on this uniquely super opportunity to make tons of easy money.
This renewed buying frenzy creates a huge rocket trend - a spike in share prices of perhaps 50% to well over 300% in a matter of minutes to days, and perhaps weeks.
Note that, now that this stock split has occurred, there are at least twice as many shares to trade at ever increasing value.
That is when the scamster execs dump tens to hundreds of millions of their shares over a short period of time. This dumping of shares creates steep drops in share value as other more seasoned share holders take notice of the selling activity of the company execs and begin selling too.
Most other traders that are on the sidelines watching and wishing they had gotten in sooner at lower prices, and many more that are shareholders, will take this unusual drop in share prices as a great unexpected opportunity to buy up the shares of this exciting stock at bottom prices before the stock prices bounce back up again. Company news releases will confirm this strategy as wise and profitable.
The selling of shares by management is considered by most traders to be normal profit taking on an otherwise super penny stock.
Such trading activity creates huge swings in share values, and volume of trading hits new highs.
Within a very short time though (days to weeks), the company execs dump the remaining shares they own, causing a steeper plunge in share value.
That is when even the many naive traders realize the execs bailed out. Many start getting sweaty because they know, or feel, they've been duped. Many frantically sell shares hoping to recover at least some of their investment.
In the end, many of the shareholders who still believed in the stock will be left holding a bunch of worthless shares.
Technical Analysis as viewed on the charts tell the story of such pump and dump scams if you know what to look for as just illustrated.
Trillions of dollars are lost to the scamsters by penny stock traders in this type of penny stock scam - the pump and dump coupled with stock splits and company management buying company shares.
So, keep this in mind as you do your technical analysis - watch for reverse stock splits, but also watch for forward type stock splits on penny stocks!
You will learn more about pump and dump scams, along with stock basher campaigns, later under the heading:
Penny Stock Scam - The Pump and Dump
Technical Analysis easily ties in Fundamental data from the data surrounding the charts.
On the left or right side of a stock chart or below it, or sometimes to the right (like on Yahoo and Google), basic fundamental information about the company is available for a stock, if such information is listed.
For instance, fundamentals like news releases, financial reports, and company information is listed along with stock charts on most financial sites. This is all helpful information that can be used with technical analysis to more accurately predict trends.
Pink Sheet stocks (discussed later) usually are missing at least some financial statements and maybe other fundamental information too.
The less information available about a stock, the riskier the investment potential. You want to limit risk; so, stay away from what you learn and know to be risky. Such potential risks will be fully discussed as you study this site.
Fundamental and Technical analysis - Study
The study and investing of any stock should begin with such essential technical and fundamental information as just discussed - as seen on the charts and next to the charts on most financial sites.
Reasons and examples will be fully revealed as you continue your journey on this site. To see an example of this, check out the addresses below:
Technical Analysis when used as a major strategy of trading stocks . . .
• is not concerned about fundamentals such as the status of the company underlying a stock or all the market influences affecting the stock or the company's influence on the market.
• believes that all the fundamental influences of the stock, including the stock's history of investment activity, is already reflected in the price of the stock at any given time.
Technical Trading of today relies on ever more complex mathematical algorithmic formulas, intelligent routing and trading software and technical indicators in an attempt to outwit other technical traders.
The purpose of such data is to predict future price movements and trends of a particular security and then locate the best potential entry and exit points to trade for a profit with minimal risk. Then to trade the stocks quicker than all or most other technical traders. All this is done to get the edge - that fraction of a percent gain on other traders.
Technical Analysis, as a major strategy of investing, is most successfully used in Day Trading and Swing Trading of stocks (explained shortly in the next two subsections).
If any strategy of investing was ever made to work with day trading and swing trading, then technical trading is that strategy.
Limitations of Technical Analysis:
Technical Analysis, as a major strategy of investing, is poor at predicting penny stock price movement for reasons already discussed in previous topics and subtopics, and will be discussed again under this topic.
In a subtopic called: Technical Analysis Disadvantages, I will again go into more detail as to why technical trading loses its power to predict explosive trends in penny stocks.
The next subsections of this topic called Technical Analysis will briefly describe the technical trading strategies called Day Trading and Swing Trading.
I show how such strategies compare/contrast with each other and with the strategies of Extraordinary Investing as revealed and taught on this site.
You will learn why some investments are well suited for technical trading.
You will study helpful information about how technical analysis is best used to fit into the different investment strategies discussed.
When you are ready, please click on the following: