Relative Strength Index (RSI)
Learning to trade Penny Stock Charts with just a few indicators can greatly enhance your ability to time entry and exits in your trading plan. Today I wanted to cover the Relative Strength Index or commonly referred to as RSI. Simply put the RSI is a momentum indicator that measures speed and change of price movements. The RSI indicator is shown on a scale of 0-100. Traditionally, RSI is viewed as overbought at 70 or higher and oversold at 30 or lower. Learning to use RSI along with other chart indicators, support/resistance lines, momentum, sentiment etc can help a trader time their entry and exit points.
As you can see in the example listed below, I want to cover a few things for you to start watching in the stocks you trade. There is no crystal ball but there are patterns you can begin to see the more you look at charts. The more you see something happen, the more you can anticipate them happening again. Over time you will begin to get a "Feel" for stock movements based on those patterns.
Below I am going to use the example of WNTR which recently saw huge volume trading at it's 52 Week Lows. Some suggest that charts are useless in Penny Stocks and even more so useless with 000 penny stocks, I disagree. With WNTR I want to point out where the volume came into the stock based on the RSI of 30, which as I mentioned above is considered oversold. You can also use the RSI to go back to see what did the stock do the last time the RSI reached 30? We see that back in Dec 2014 the RSI came down to RSI 30 and bounced from 0005 to 0018. At that time the 50 Day Simple Moving Average was at around 0015/0016 and on that same bounce we see that the PPS was able to test the 50 SMA but couldn't hold it as support once it broke through it. The RSI at the high of that bounce reached around 58 where it is currently at today. I also want to note that Friday's move also reached the 50 SMA which has been the downtrend resistance line for over a year now. Friday's volume is worth noting here. The previous bounces off the 30 RSI line were not met with such volume. Strong stocks don't go back from where they came. In other words, if there is strength behind this bounce and volume we want to see the stock stay above the 0005 support , at the least 0003 IMO. Also, in a strong uptrend the RSI will stay above and actually use the RSI 50 line as support. It is not uncommon for the RSI to reach the high 90's in a penny stock but a good rule of thumb is to begin talking out some of your profits at or above 70. Another important note is to look at the RSI as how much gas is left in the move. When coming into a strong resistance point such as a 50MA or 200MA or a 52 Week high and the RSI is already in the 70-90 ranges, there is a good chance that it may not always be able to break through that resistance so when evaluating your trade plan, these are areas you may want to take your profits or go into capital protection mode.
Currently WNTR RSI is 58 and currently at a long term resistance point being the 50 Day SMA. I personally do not have a position here but I would want to see the 50 SMA break and hold as support and I want to see the PPS moving higher on increasing volume.
With just a few basic charting skills you can greatly increase your success rate as a trader in the OTC markets but not just for penny stocks, charts work across the board with Nasdaq, Forex, Etf's, etc. Let's get started with some basic terminology.
Simple Moving Averages: The 200 day simple moving average is really just that. It's a line that represents the price movement over that last 200 days and gives you a graphical image of the averages. The theory works the same with all other moving average days. The longer the simple moving average indicator you see, the longer that price period has moved in the direction it is showing you. The shorter moving averages like the 10 day and the 20 day will give you a much closer look at the direction based how tight they are moving to the candle sticks. What we want to see using these simple moving averages are reversals in their direction.
As you can see in the chart example below, all major moving averages are in a down trend. For most people that is not positive. For a technical trader, this is the time I begin moving these type charts to a watch list. What I want to see as these charts begin to find a support or a "bottom" is larger than usual volume without price movement. There are also other indicators that can pick up this type of accumulation but we can cover them later.
At this stage of the chart I still want to see the shorter term indicators begin to flatten or go sideways showing to me that there may be a bottom setting in for the stock. When you begin to see short term moving averages such as a 10/20 Day SMA begin to push upwards on volume you may have a reversal starting or at the least a bounce.
For now this example would be a watch list chart. There appears to be selling in the 0001/0002 and most likely this is funder dilution. The risk of jumping into these too early is without researching the debt note conversions you never know just how much could be selling and you risk a stock going to no bid. For some traders you could take whats called a "lotto" but for this example we wont discuss.
The static support and resistance lines show that this chart could offer a couple of different moves if it reverses. Ideal trade set up IMO would be when the simple moving average lines begin crossing upwards and the price action movement is supported by higher volume giving you a possible trade from .0004 to .001 or a little better than 100% move.
How To Trade Penny Stock Charts Using The SAR Indicator
I have been receiving numerous emails about trading penny stocks with charts and the actual validity of technical use in the OTC markets. There are many that would argue they are not valid due to manipulation and I would argue that most of the markets, even the big boards are for the most part manipulated but that's a different subject.
Today I wanted to cover a simple trading tool that when used can help you identify reversals in market trends. Let me start by stating I do not view myself as a technical expert and as I learn I don’t mind helping others spot trends and patterns that I have used to help me become a better trader. That’s the name of the game right. Perfect your systems and self discipline to become better at trading, i.e. making money.
Today I want to cover the Parabolic SAR or commonly referred to among us traders as a “SAR”. The SAR quite simply means to stop and reverse. Now I am not going to get into the scientific formulas on how this works but wanted to touch base on this to give you guys something to study and begin following in some of your own plays and become familiar with.
It’s important to note that as with any indicator, you should not buy and sell based purely on just one indicator. Used in conjunction with other indicators, these tools can help you make better decisions on when to enter and exit a position.
So let’s review the SAR in the trading of GBGM. The SAR on my chart is the white dots (not the dashed lines) that is either trending above or below the candle sticks. When a SAR flips bullish (From top to bottom) you will see a significant change in the trend, this is referred to a Bullish SAR Flip. In contrast, the Bearish SAR Flip works in the same manner. Notice after the candle trend had continued to trend higher and higher after many trading sessions and the chart began to reach a significant resistance point in the .02 ranges we encountered some heavier selling and profit taking. Once the PPS dropped below the lowest SAR dot, it flipped Bearish, or bottom to top. This signaled a reversal in trend, and correction began to take place.
It’s important to note support and resistance lines in the chart correction because that is a good place to add to your position or watch to ensure that the chart holds because let’s face it, gravity takes over at times on these penny stocks and they become very volatile. At the time of this review, the PPS has found support and appears to be trading sideways in a consolidation pattern above the 50 SMA which is what we want to see.
As the chart consolidates notice the SAR continues to become lower and lower on the daily chart sessions. If support continues to hold, or the pattern continues to go sideways, the SAR continues to drop lower and closer to the candles. This is something to keep any eye on and can trigger another Bullish SAR flip.
Keep in mind this is just one indicator to study when trading charts but it is a strong tool that I have used for many years and once you master it, you can reap the benefits. Think of the SAR as the charge signal in the battle of the Bulls vs Bears. Depending on the direction it flips, you have a good indicator of which way the chart will begin to trend.
As always, my thoughts are just my opinion, and shouldn’t be taken as financial advice. Please do more independent research and test what you learn as you go and grow into becoming the best trader you can be.