As most penny stock traders know there are two ways of analyzing stocks – Fundamental (using company information on management, debt, lawsuits, revenue, and others) and the other is Technical (by using the historical trend of price movements and penny stock technical analysis methods).

While most traders tend to prefer the fundamental route to find the best penny stocks, they do need to use technical analysis to understand the behavior of stock movement. An opportune combination of both these analyses can be beneficial. Let us look at some of the technical analysis methods that can be very helpful to buy penny stocks.

Various Technical Analyses

RSI – Relative Strength Index is a type of momentum oscillator that keeps track of the speed and changes in price movement of penny stocks on a scale of zero to 100. This is an essential indicator for penny stock analysis. As a rule of thumb, an RSI over 70 indicates an overvalued or overbought stock. This can also indicate a pullback or trend reversal could be coming. A value of 30 or less indicates an oversold/undervalued stock. This will indicate a price reversal on the stock could be in motion.

Bottoming-Out Penny Stock Chart Patterns

These are visible after a continued fall in the share price ends up leveling out. The resulting trend will be sideways at this point.  A sudden increase in trading volume along with price movement shows an upswing in the pricing and a recovery period. This can be seen when the stock has been trending with an oversold RSI.

Price Drops  

Thinly traded penny stocks can see extreme price volatility and an imbalance in trade. This can cause share prices to dip significantly on more selling than buying. A sudden drop in price is considered a price dip. Low volume can be discerned as a reverse trend. In this case, in an uptrend, if the price continues to move higher but volume begins to drastically decrease, this can signal disinterest in a particular penny stock. In many cases, when buying volume dries up and the price stops moving higher, shareholders can get anxious and begin selling. With thinly traded small-cap stocks, a steep sell-off can trigger a big price drop. So pay attention to trading volumes especially when looking at a penny stock that has been breaking out for a few days.

Topping-Out Penny Stock Chart Patterns

This is similar to a bottoming out pattern except in reverse. Prices seem to be rising but then level off or turn sideways. This can be a break before moving even higher. Again, as with many trends, it’s important to keep an eye on trading volume and momentum indicators to see if there is still a good flow of buying coming into the stock and not selling.


This occurs when a stock opens higher or lower than the previous trading day closing price. A higher gap or “gap up” is a bullish indicator and a lower gap or “gap down” tends to be more bearish.

These are some of the most commonly used trends for penny stocks and one can use these in various combinations.

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