The following patterns are some of the ones I’ve found which seem to be more reliable when it comes to low-volume penny stock shares. After all, when a technical analysis indicator can’t be trusted, it becomes useless – or worse, could cost you thousands of dollars if it misleads you.
Bottoming Out Pattern
This type of pattern emerges after a long, sustained slide in the share price. The trend goes from downward over months, to sideways (usually for a couple weeks).
When this occurs coincidentally with a sudden increase in trading volume, especially if this is in line with an oversold condition, the shares may be about to enter a long, sustained recovery in price. Often, the shares which display a bottoming out pattern will be some of the best long-term holds.
Since penny stocks are often thinly traded, they can have massive price volatility simply because of an imbalance in buy and sell orders. This can lead to shares dipping significantly when sellers outweigh buyers.
You will recognize a price dip pattern when the penny stock suddenly drops but does so on no news and on very low trading volume. The opportunity with price dips is that they usually reverse, and typically within hours if not minutes.
The way some investors play (and benefit from) price dips, is to be in the right place at the right time. By keeping a buy order on a thinly-traded penny stock, which is significantly below the recent or current price, you may catch any shares which “fall through the cracks.”
By this I mean when someone puts a market order to sell, if that trade is much greater than the current line-up of buyers, it may result in some of the shares which are being sold going for significantly lower prices. Your open buy order may get some of these shares.
Topping Out Pattern
This is similar (only in reverse) to the bottoming out pattern. Shares have climbed for a long time and now appear to be leveling off, or trading sideways.
While this may just be the stock “taking a breather” before resuming the advance, when it appears in a penny stock, coincident with a declining daily trading volume and an overbought condition, the profit takers may be preparing to move in. In other words, shareholders start to sell to capture these new, higher prices, while buying dries up, the end result of which is tumbling share prices.