Breaking Down Patterns with Penny Stock Technical Analysis - dummies

Breaking Down Patterns with Penny Stock Technical Analysis

By Peter Leeds

Technical analysis (TA) isn’t just about spotting a bullish indicator but also knowing when that indicator still applies and when the pattern is breaking down. The moment when a TA indicator breaks down, it no longer provides any clues as to future share price direction.

Even when TA indicators play out exactly as you had hoped and predicted, their impact will only be temporary. TA is about spotting trading opportunities at a moment in time, and those opportunities will change or fade away, and likely very soon.

TA indicators such as trends, support levels, and consolidations demonstrate where shares of a penny stock may go and eventually break down. Perhaps the trend reverses and shares start moving in the other direction. Perhaps the support level stops supporting the shares any longer, and the stock plunges through to lower prices.

Often a pattern will break down, and no tangible or useful indicators replace it. Other times, a new pattern will take the place of the old, and you need to adjust your outlook based on these factors. For example, a strong downtrend may reverse and be replaced by a gradual uptrend. Perhaps share price momentum fades away, but nothing appears to replace it. A perfect consolidation pattern may suddenly break down and no longer be at all predictive in regard to share price activity.

Always watch the TA patterns for signs that they are holding up or breaking down, as described for each individual pattern later in the chapter. No longer relying on a TA indicator that has broken down is just as important as finding it in the first place.

For each penny stock, watch for multiple TA patterns. For example, you may find a support level, a bottoming out indicator, and strong relative strength, with all three suggesting higher share prices. The agreement of multiple indicators should increase your clarity of your trading decisions.

Trading patterns are elusive, and that is even truer with thinly traded penny stocks. If you see a technical pattern or indicator on one-third of the charts you review, then you’re not doing it right. You may look at 20 or 50 charts and only see a couple of solid TA indicators that have enough trading volume behind them to suggest that you can trust them. However, if you do look at fifty charts and find only a couple of indicators, you will probably do very well with those trades.