No matter how much you believe in the value of technicals for stock analysis, using charts can give you a more complete view of how a penny stock is fairing over a period of time. You can look at how a stock has performed over a month, year, 5 years, etc, and decide if it’s staying pretty steady, or if it’s been jumping around a lot.
Different chart patterns show trends in the stock over a period. A few of the more common patterns are triangle chart, double top and bottom, and head and shoulders. Each of these patterns can be interpreted differently, and can signal different price action in the future.
There are 3 triangle chart patterns; symmetrical triangle, ascending triangle, and descending triangle. Symmetrical triangle patterns arise when the stock price is rising in falling in a way that illustrates trends towards a point in the future. An ascending triangle pattern occurs when an ascending price is met by resistance but never dips below its support. And a descending triangle pattern shows the opposite; periods of low support followed by spikes to push to old levels.
Double top and bottom trends show an attempt by a security to maintain their current trend. A double top (which resembles an “M”), usually marks an impending downward trend. The security which is rising experiences a sudden decline and tries to recover to its previous peak. It then falls again, going below the previous level of support. For a double bottom, it’s the opposite effect.
A double bottom (“W” shaped trend) marks future upward trend. The security makes a move downward, followed by a period of support that brings the price back up. Then it makes another move downward, and turns back towards the period of support. If it is able to break past the period of resistance, it’s usually a good sign that the stock is in an upward trend.
Head and shoulders trends look similar to double top and double bottom trends, but have an extra peak or trough in the graph. A head and shoulders top trend has 3 upwards trends followed by 3 downward. The first and the third peak are roughly the same height (shoulders), and the middle peak is the tallest (head). This illustrates the stock trying to maintain its period of growth followed by a decline halted twice by periods of support. In this trend, the stock usually is bearish and will continue to fall past the two established points of support.
In a head and shoulders bottom trend, the stock is showing bull flags. The neckline (periods of support in top, periods of resistance in bottom) is the point that traders watch to see when the stock breaks through. If the stock can break through the neckline and past the point of resistance, it’s usually a sign that it will continue to build and grow.
It’s important to watch the indicators, like the neckline and the point on the triangle graphs, before taking action on a security. Moving too quickly can lead to misreading a trend’s bull or bear signals, and misinterpreting the future growth or decline of the stock. Keep your eye out for all the trends, and take the time to interpret correctly, rather than resting your hopes on the future price of the stock.
