Lesson 8: Chart Setups

Understanding how to read stock charts can be very useful when trying to figure out support and resistance levels to place buy and sell orders for penny stocks.

While penny stocks do not generally have the trading volume and history that supports the use of charts in the same way as they can be used for big board stocks, assessing the charts for a penny stock can provide a trader a trading advantage and various chart setups are worth taking the time to learn.

Key Indicators we look for:

50-Day Moving Average:  A break out above the 50-Day Moving Average is a bullish indictor, as it shows near-term momentum in a stock.  Stocks that are trading above this short-term moving average may continue to move higher with the chart resistance from the moving average being absent.

200-Day Moving Average:  A break out above the 200-Day Moving Average is a bullish indictor, if the stock market is recovering from a slump.  However, a break of the 200-Day Moving Average to the downside is a bearish indicator, as it indicates a weak stock with little support on the bid, and is a signal to sell.

Golden Cross:  A “Golden Cross” is when a short-term moving average (such as the 50-day moving average) crosses above a longer-term moving average (such as the 50-day moving average).  This indicates upward momentum in a stock and is a bullish buy signal.

MACD Cross:  A cross of the Moving Average Convergence Divergence (MACD) over the 0.0 region is an indicator of a bullish breakout in a stock.

Bollinger Band Squeeze: A pattern in which two Bollinger Band lines converge, indicate a stock squeeze may be set to occur and a break out to the upside may be imminent.

Below are examples of attractive chart setups:

The Chart Breakout:

The stock featured in the chart below experienced an uptick in volume, as the stock sold off.  Volume then decreased as the stock consolidated and tested support several times just below two cents.  Shortly after the MACD crossover, the stock broke out to the upside on heavy volume.   The 50-Day Moving Average then served as support during the upside rally.  The stock hit resistance and consolidated in the area of the 200-Day Moving Average.

The Bottom Bouncer:

Did you ever wonder how to know when to buy a stock after it experiences a sell-off?  Charts can provide guidance.  The bottom bouncer candlestick chart below reveals that downward momentum has turned into upward momentum, as the candlesticks go from red to green.  To play it safe, the white trend line can be used as a level to start taking profits on the bounce up.

The 50-Day Moving Average Break & Higher Highs Entry:

A chart that shows a stock breaking through the 50-Day Moving Average line is a bullish indicator, especially if it occurs with decent volume.  The chart below shows many indicators that provide confirmation that the stock is experiencing an upside breakout that has legs.  These include:  a substantial volume increase, a RSI that slopes upward, a MACD crossover, and a stochastic DI & DI- cross.  .

The chart examples used in this lesson are not only useful when analyzing daily charts; they can also be used as guidance when engaging in intra-day trading, commonly known as day trading.  You just need real-time charting and a chart setup that looks at trading intervals in the one to fifteen minute range.  You will see many of the same chart patterns and indicator confirmations on short-term charts that can be used to profitably trade stocks.

It should be kept in mind that chart pattern analysis and indicators should be used in conjunction with solid due diligence and fundamental analysis of the company behind stocks that you are considering trading.  Stock can defy the charts when fundamentals or news cause a wave of buying or selling pressure, so it is important to understand the stocks you are trading and stay up with the latest company developments.  What charts do is provide you a leg up when trading stocks, and therefore are essential to any successful stock trader. 

Congratulations!  You have are now a graduate of the Trading School and are ready to start trading penny stocks!  We hope these lessons will help you develop your trading skills, so you can become a successful penny stock trader and benefit financially from your success! Good luck!  It’s you against the rest of the market.  Knowledge is Power!  Continue to learn to gain an edge when trading penny stocks!




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