Chapter Eight: More Penny Stock Chart Patterns

The Symptoms: You have constant variation in a stock’s trend. There’s no discernable trend. I’m a pattern player, so how am I supposed to play a pattern when I can’t even tell what it is?

The Treatment: Avoid messy charts because they lower your odds of success and they play games with your head. I’ve been doing this for a long time, and I’ve come to hate messy stocks that are all over the place. They’re just not predictable. Learn from them, but don’t trade these stocks.

chart pattern: Messy

As you’ll see, this stock is nice and clean sometimes, but during certain time periods, it’s very messy. You can see there’s some meaningful news right at the beginning of June; you can see the stock goes up from $2.75 to $3.75 after they had a successful demonstration of their technology.

But then what happens? It does nothing. It goes up $0.40 a share, but who cares? The volume goes up to 1 million so you might be able to take advantage of it a little bit, but overall it’s just not worth it. Throughout the month of June, it does nothing. It goes between $3.75 and $4.25. BORING.

You see another bump up in July when the company released a video of their successful demonstration and the stock moves up basically $0.60. Now, again, it’s boring. Even though there are earnings at the middle of August and the stock goes up from $3.60 to $4 dollars, it still goes back down a few days later. It’s messy. It’s boring. Ignore it—there’s no chart pattern here to play.

chart pattern: Messy bullish

If you’ve read my book, you know that I traded this stock quite successfully for a while, making $100,000 dollars a few different times. But during this period, the stock is messy—and it’s boring. When I say a stock is boring, it’s because I like stocks that go from $7 dollars to $10 dollars in a day or two. This is seven months. Forget that!

Look at those movements. There’s a drop-off in mid-November from $8.50 all the way down to $7.25, but then the company reported earnings and the price goes right back up. They also reported earnings in mid-February, and it went up from $9.50 to $10 dollars before dropping back. It’s messy. It’s still bullish, but it’s messy. Ignore it.

chart pattern: Messy bearish

Here’s a messy bearish stock—GoAmerica. I’ve traded this when it was nice and clean, but during this time frame, it’s messy. As you can see, the stock has gone from $8 dollars to $5 dollars—a $3 dollar move. But it’s very gradual. You have a few down days from $7.50 to $6 dollars, but then—guess what? They reported earnings.

The earnings weren’t so good but unfortunately, there’s really no way to profit off that. You had a big move right on the news, but right afterwards, what do you have? You have a whole bunch of little red dots on this chart where it goes from $6 dollars to $5.50. That’s just not enough to make money off of.

That’s why I always recommend that you never trade in front of earnings. Wait for earnings and wait for news to come out, because why risk it? A lot of people could say, “It’s going to be bad,” and then the stock could go up because of everybody’s expectations—even if they still have bad earnings. So, forget about the news for a second. Wait for the news to come and see how the stock reacts. It’s a lot safer, and it’s a lot easier to play the reaction, because that’s the type of trend that usually continues.

Here’s an example of a messy breakdown. You see a nice little up-trending chart all throughout June and July, where the stock goes from $4.50 all the way up to $8 dollars. It was going up very nicely, very gradually but then there’s a breakdown. This is just a mess. The reason for the whole upsurge was that the stock was upgraded by an analyst at the end of May. An analyst actually covered this tiny stock. You could have made some money on that trend and kept going, but the reason it’s so unappealing to me is how long it takes to move $0.50 or $1 dollar.

I don’t have the patience to play it, but maybe you do. You can see at the beginning of August, this is when it really starts to get messy on the right hand side of the chart. The company reported earnings right when it went from $6.50 to basically $7.50 in 3 days, but then it broke all the way down to $5 dollars. Then they bought new tankers (they’re an oil tanker company), so they rebounded from $5.50 to $6.50.

There’s really no good way to play this. You have news—it moves one way. Then, the next few days, it moves the other way. It’s a messy breakdown—and it’s one that you’re better off ignoring.

Here’s another example of a messy breakdown:

This is Reeds, the beverage maker. Beverage makers were really hot a while back, but what happened? The reason why this stock jumped from $4 dollars to $5 dollars at one point is because a BusinessWeek article came out saying that this beverage company might be the next hot stock. Again, this is the type of news where you see a big move one day but that can also help the stock continue.

So you buy the stock, it goes from $4 dollars to $7 dollars and then it rebounds and goes back down to $6 dollars. You’re not really sure if it’s going to keep going or if it’s going to fall back down, but I wouldn’t recommend making a move here because it’s too messy. But you can see the break out where it goes from $4 dollars to $7 dollars, and then when it goes down to $6 dollars and, two days later, it breaks out of $7 dollars.

Do you see where it breaks $7 dollars? Right there, you had two solid days where it goes from $7 dollars to $10 dollars. That’s when you buy it. You buy it right when it does the breakout. It actually did a nice little cup and handle—it’s a quick one, but that would be the only time on this chart to buy. You can see that it tries to breakout on the right hand side of the chart in July. And it does breaks through the resistance at $9.75 and gets to $10 dollars, but then it does nothing before going right back down to $9 dollars and then managing to break out to $11 dollars.

Really, though, that’s such a pathetic breakout and it’s so messy that it goes straight back down. You’ve got one tiny little opportunity, but overall, I’d recommend against buying this chart (or any other messy charts, for that matter).

Here’s a messy cup & handle, as you can see. This stock is extremely messy. It’s a higher priced stock, but it used to be a penny stock. This chart shows it going up from basically $5 dollars a share, all the way up to $30 dollars.

You can see that there’s a nice little peak at $37.50, and that the stock spent the rest of the year trying to get back to that peak. You can also see that in May, it pretty much broke down. It tried to hit $37.50 again, but it couldn’t do it and fell all the way down to $32.50. Then, it rebounded again and tried to get back there in June, but it couldn’t do it. Then, things get really messy through June and July. It manages to break it, but again, there’s no big move until August (when the company reported earnings).

You really can’t predicts this kind of breakout because it’s so messy. Even though you probably could have made money if you timed things perfectly, the odds of success here just aren’t high enough to interest me.

Here’s another messy cup and handle to look at:

This is Amish Naturals, Inc. They make pasta—seriously. And I guess their pasta is pretty good because they’re considered to be a growth company. On the left hand side of the chart, you’ll see in March that you had a nice downtrend from $2.40 all the way down to $1.40, pretty much over the course of a few days without any interruptions. What happened was that there was a negative article run about the stock, so the price dropped. It rebounded later on in mid-April, when the company announced that they were going to sell pasta online.

Personally, at that point, I had no idea that people would be interested in buying pasta online. I like to buy other stuff, but maybe some stay at home mothers would like to buy some pasta online. I don’t know. Like I said, it doesn’t really matter what you think about the company itself. It’s all about the price movement. So the stock rebounded again, but it’s very messy all throughout May, June and July. And then look at at all those bounces in the end of July and the beginning of August. The company had just announced plans to sell their pasta in Whole Foods and other grocery stores. It’s very positive news, but the stock still only moves $0.20.

Basically, it’s boring. Ignore this stock, and ignore any other messy cup and handles you see out there.

chart pattern: Messy Double Top

Here’s a messy double top. This is a lower priced stock, although you can see that it trades quite a bit of volume at over 1 million shares a day. There’s a decent run-up around mid-April from $1 dollar to $1.80, but although the chart looks pretty steep, it’s just not a big enough move in terms of pennystocking.

In this case, even if you’re perfect, you’re still only making $0.80 a share. For pennystocking, you have to find stocks that are going to move $2-5 dollars a share so that you can profit during some of the waves. With this, if you’re perfect you make $0.80 a share, but if you’re not, you make $0.20 a share or you lose money. It’s just not worth the risk.

That whole run-up was caused by a good earnings report; you see, obviously, that this is a nice little cup and handle try where the left hand side of the cup is in April at $1.90-1.95. The stock tries to make $2 dollars, but it can’t. Then, it takes almost two months all the way until July when the volume spikes up again to break $2 dollars. But it’s such a messy breakout that it goes to $2.20, then it goes almost straight down.

This happened because, when the stock was at $2.20 a share, the company announced that it had sold shares to institutional investors at $1-1.40 a share—a nice little 50% discount for investors. This shows that the company is desperate for cash and you can see what the stock price did. This is again, just messy. Stay away from it.

Messy charts are some of the worst plays you can make, so study these hard and learn to avoid them. Want to see even more examples? Apply to join my millionaire trader challenge to see me dissect live examples of messy charts in front of your eyes!