How to Analyze Penny Stock Chart Patterns

How to Analyze Penny Stock Chart Patterns
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The U.S. Securities and Exchange Commission defines a "penny stock" as a stock with a share price below $5. Penny stocks are not listed on established stock exchanges, such as the NYSE, the Nasdaq or the S&P 500, and their prices can be highly volatile. For investors interested in such a speculative market, penny stock charts can provide information that is useful in the analysis of movements in share price and identification of profitable trends.

Continuations and Reversals

A penny stock chart can display in a single, compact format a substantial amount of useful data. Penny stock charts show which direction the stock prices have moved. They can also show signals as to when a stock will continue in that same direction and when it will reverse course. A continuation pattern signals that the stock will continue its previous behavior, while a reversal pattern shows that a trend will go in the opposite direction.

Head-and-Shoulders Patterns

A head-and-shoulders pattern for a penny stock consists of three peaks. The peak at the highest point forms the head, while the next highest peaks -- one on each side -- form the shoulders. A complete head-and-shoulders pattern signals a downward trend. An inverted head-and-shoulders pattern involves three troughs, with the lowest in the middle and two higher troughs, one on each side. A complete inverted head-and-shoulders pattern indicates an upswing.

Triangle Patterns

Penny stock chart analysts can also examine price trends with triangles. The analyst identifies the endpoints of the triangle by choosing the start and end dates. A vertical line for the start date forms one line of the triangle, while the trendline for the high and low stock prices over that time span form the other two lines. An ascending triangle pattern has the bottom line of the triangle sloping upward, indicating a stock on the rise. A descending triangle pattern has the top line sloping downward, signaling that the stock is in decline.

Double Top and Double Bottom Patterns

A "double top" pattern consists of two peaks with a trough in between, while a "double bottom" pattern includes two troughs with a peak in the middle. Both patterns function as reversal signals. A double top pattern signals to investors that the stock is on the decline, while a double bottom pattern shows that the stock is on the rebound.