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Blog : Penny Stock Consolidations
January 28th, 2009
When the penny stock trades in a relatively flat range for weeks, or more usually months, this may be a consolidation pattern. Consolidations can happen at any point, and often appear after long run-ups. They are excellent buying opportunities.
They are a result of shareholders that are impatient or disenchanted with their investment, and who are unloading their stock. This subdues the effect of any buyers who are just getting involved for the first time. The end result is an unusually flat trading range.
Think of it as, "out with the old, in with the new." Current investors are leaving, passing off shares to new incoming investors, with the end result being little price change from either selling pressure or buying demand. The ownership of the company's shares undergoes a major shift, but the stock looks like it is practically asleep.
The longer the consolidation pattern the better. What you want is to see a good turnover in shareholders, with a major portion of the company being held by fresh investors.
If most shareholders have just acquired their stock, they are far less likely to turn around and sell. In addition, if most of the long-term shareholders have exited their position, the upward trend that follows may be unbridled since there are few traders left to sell into any potential gains.
If you think you've found a consolidation pattern, you can be more sure by doing a quick check. Look into the daily trading volume for the period in question. Add up the number of shares that traded hands the entire time, based on each day's volume. Next, compare that total amount to the number of outstanding shares.
If there had been a share turnover of at least 25%, but hopefully even more than 60%, then you may have a strong consolidation pattern. Make sure that the shares traded in a flat or narrow range during that time.
For example, picture ABC Inc., which usually trades with high volatility. It suddenly enters a three month period where the shares stay in a narrow range, with all trades falling within $1.10 and $1.25. The daily volume for all the days in that three month period adds up to represent 40% of the total of outstanding shares. In this example, you can be pretty sure that you are witnessing a consolidation pattern. ABC Inc. may be poised for a pretty strong run-up, which may come soon, or perhaps a few months later. Either way, you have increased your odds of making a winning trade.