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Blog : Two Technical Analysis Trends for Penny Stocks
February 5th, 2009
Leeds Analysis can help you find the best penny stocks, based on fundamentals. However, there are also several technical indicators that can lead you to high quality companies, when they are trading at discounted prices.
Here are two such indicators, the "Dip" and the "Collapse." We'll cover some others in future articles, such as "Support Levels" and "Topping Out." Then you can combine these technical indicators with the fundamental analysis detailed in the free, online book by Peter Leeds, "Understanding Penny Stocks."
Get the highest quality penny stock companies, at the best prices, using Leeds Analysis. You can learn all about Leeds Analysis, and get your free copy of "Understanding Penny Stocks," by visiting www.PeterLeeds.com.
Dip
Sometimes a penny stock drops sharply by 10% to 30% (or more in some cases), but the dip is based simply on a temporary lack of buying demand. (Or alternately, a sudden increase in the amount of selling volume). Because penny stocks are thinly traded, they are very subject to such 'buying opportunities.'
If the dip is not based on a deeper problem, it can be an excellent opportunity to accumulate shares. A true dip is both temporary and unfounded. Investors who get involved in a fundamentally strong penny stock by buying into these dips are generally looking at profits of 10% to 20% within a matter of days.
Generally, the trading volume may be very light at the time of the dip, further solidifying the idea that the price slide was brought on by a lack of activity, as opposed to a panicked sell-off.
Collapse
The danger here lies in the fact that a collapse looks exactly like a dip. The difference is that the collapse is permanent. Often a collapse is brought on by fundamental factors, such as a law suit or a poor financial release.
In some cases, however, a penny stock has just been 'over reaching' its true value, and once the naive buyers get all their shares with no regard to the company's true value, and the buying dries up, there is nothing to help maintain the prices.
You should be able to avoid collapses by getting involved with fundamentally strong penny stocks. If the company is already bringing in earnings for an excellent P/E of 5.0, it is less likely that it will collapse and force the already strong valuations down to something absurdly attractive like 3.5.
(Note: I have seen this happen with a stock I owned, called Wheaton River Minerals. The P/E ratio was already very strong, then when the stock dipped it became ridiculous. I had patience, and eventually the shares more than quadrupled).
However, if what you thought was a fundamentally excellent company suddenly collapses and does not recover, you may be missing something.