How to Read Penny Stock Charts

Been thinking about this post for a while now, and I believe it’s time to really dig into it. Anyone wanting to know how to read penny stock charts really needs to understand first of all why it’s important to read the charts in the first place. The last thing I or anyone else should want to do is waste our time doing things that really won’t produce results. I can confidently say that any time spent studying price charts is NOT in vain, and actually it will be one of the most important practices you can get into in your trading career. I recommend studying as many charts on as many penny stocks as you can possibly lay your eyes on. I have, over the past 9 years, looked at literally thousands of price charts, and I know how to assess a penny stock’s chart and arrive at a decision within seconds of first laying eyes on it. This is a practice that is second nature to me now, but folks, it takes TONS of practice to be able to operate in this manner. By no means am I an expert yet, and by no means have I figured it all out, but I do know enough to know what to look for when buying penny stocks. I would like to say that there’s some magic shortcut you can take to be able to do this within minutes, but it just doesn’t exist, and as a matter of fact, if it did exist, I don’t know if I would want it anyway. Why, you ask? Because I have to know the inner workings of things (it’s just my nature), and if you are just handed stuff on a platter all the time, you may never be able to stand on your own two feet if the source of your “shortcut” were to disappear. So I believe in good old-fashioned work, and that includes getting a penny stock screener and then putting your nose to the grindstone by looking at hundreds of charts. Look at good ones, crappy ones, stocks for 0.0001, stocks for over $2.00, and everywhere in between. One thing that I try to do from the beginning when I first look at a chart is to see how thin the trading is for the stock. If you see a bunch of sporadic price movements, or days with no trading range whatsoever (in other words, the open, high, low and close are all the same price), or ridiculous gaps in the trading price, you’re looking at an illiquid stock, and that’s what you want to stay far away from. Take a look at this chart of Somerset International Group, Inc. (ticker: SOSI), which in my opinion, has everything wrong with it:



As you can see, there are quite a few “flatlines” where the trading range simply does not exist, there are days with no trading volume at all, there are extremely erratic gaps in the stock’s price, and in general it just looks ridiculous. Yet, as of 9/3/10, the stock jumped up 166% in one trading day—that would make any amateur penny stock investor get all excited, but little do they know that this is more than likely one of those classic cases of penny stock manipulation that are well-documented in the OTCBB markets. When I talk about being able to tell what the insiders are doing and then capitalizing on it, there’s a way to go about it, and then there’s a way to NOT go about it. Picking penny stocks with erratic, goofy price action like this is a surefire way to lose in the markets. The kind of price action I’m talking about requires a stock with decent liquidity, a stock where you can see consistent daily volume and consistent days with decent trading ranges, normally tight but not too tight to where there is no price action at all. One of the most perfect examples of the type of price action I’m talking about can be found in the recent chart of Andean Resources (ticker: CA:AND). I read about this stock on King World News, and it escaped me because I don’t focus much on the Canadian markets, but when I saw the chart, it was enough to blow my hair back. You couldn’t ask for a more perfect example of how a penny stock goes from accumulation phase to markup phase with near-seamless price action. Everything you could want to see when evaluating penny stocks can be found in this chart. Check it out:


Word on the street is that the reason for the jump in price to over six bucks per share is because Andean is being acquired by a larger gold mining corporation, and the shares are being marked up as a result. This is news on the fundamental side, and honestly, had I known about this price chart before the big jump up, I wouldn’t even have had to know anything about the company to know that there was a major spike on the horizon. The narrow sideways channel, stepping up into a slightly higher level of consolidation around the $3.00 level beginning in mid-April was a dead giveaway that a major move up was about to take place. I’m sure that those on the inside knew that the acquisition was coming long before any public announcement, and trust me, the only way that this price move could have been foretold was on the price chart itself. I highly doubt that any fundamental data gave any clues. Don’t miss the very last bar on the chart at the far right—yup, that’s a gap up to over $7.00, on 73 million shares worth of volume. I think it’s safe to say that the top is near. It will probably break back down, the price will temporarily collapse, and then another period of accumulation will begin. Trust me, if you think that now is time to get in on Andean, you’re extremely late to the party, and you’ll have a bumpy ride for a good minute. You’ll be buying at the top, which is a cardinal sin to the technical trader, and should be to everyone else, but again, people for whatever reason only want to get into a stock when it’s “popular”, and not when it’s on the bargain counter. If everyone’s talking about it, you’ve already missed the move. Try to go where the outlook is bad, not good. Here’s the chart of a stock that I think is ripe for a move in the decently near future, and you tell me why you think I’m highlighting it:


Here we have a 6-month chart for Cell Therapeutics Inc. (CTIC). It had a total collapse from the $1.00 level back in mid-March of this year, and it’s just been slinking along in an extremely tight trading range for the past two months. It’s virtually impossible for this stock to keep on going in the manner that it’s going now without some kind of eruption in price. It’s like a spring that’s being coiled right now, and eventually it’s going to be uncoiled with force…it’s really like a compression of price, if you will. This type of tight trading range, with the decent volume, is something that can not go without some type of price event that breaks from the normal price range right now. What we’re seeing is very tight intraday price action, with $0.40 being a very obvious strong resistance point. There’s been a few times when the stock’s price has “peeked” above $0.40, but there hasn’t really been a strong close above $0.40 in the past month, which is a telling sign. The past month the stock has been just strolling along in a sub-$0.40 sideways channel, conveniently bumping up against the $0.40 level but then retreating every time. My supposition is that if we see a break above $0.40 and a CLOSING PRICE above $0.40, watch out. I’m not fully confident in calling how high it will rise because the formation is not extremely mature (only about one month of the “right” price action going on), but I will say that any break AND CLOSE above $0.40 spells a run up to possibly the $0.60 level (a 50% increase), or even higher. So long story short, I believe that dropping some money on CTIC may be worth your wait, if you’re willing to wait. As to when the stock will break above $0.40, I have no freakin’ clue on Planet Earth. But I do know that in order to position yourself properly with this one, you gotta enter before the breakout so that you won’t be chasing the run up. Some people like to buy on the breakouts, and I have nothing against that, but my theory has always been “If you know the stock is going up, why wait to get in?” Some people would argue that if you buy before the breakout, you run the risk of waiting a long time to see the stock move. This is true, and I really don’t have a rebuttal for that, but I believe in being patient with the markets anyway, so waiting doesn’t bother me at all, and by buying before the breakout, I usually get in at a way better price than many breakout traders do.

Okay…I have dragged this post on till kingdom come. Just wanted to share a little bit of my personal take on how to read penny stock charts. There’s so much more to know as far as what to look for when buying penny stocks, and much of it can only be learned through time and experience. But, if something I shared here can give someone a leg up, then I’m all for it.