Stocks & Commodities V. 23:1 (18-29): Las Vegas Or Los Nasdaq? by Markos Katsanos
Have you ever seen a low-priced stock in your watchlist
go up by more than 50% in a day and wished that it had
been in your portfolio list instead? Here’s a method
for picking stocks before they break out.
Most traders and market technicians avoid penny stocks. In fact, their stock screening usually includes a
filter to eliminate stocks priced at $5 or less. The most common reason cited is that technical analysis does not apply to penny stocks. But is technical analysis really irrelevant where penny stocks are concerned? I decided to investigate.
For my research, I compiled a list of 50 stocks priced below $3, all trading on major US exchanges: the NYSE, Nasdaq, or AMEX. I made a note in an Excel spreadsheet of the values, direction, and (where appropriate) divergence of 30 different indicators or statistical metrics, one day before a major breakout. I used indicators with their default values plus two additional time periods.
The average breakout of the sample was 150% in the next few days; the minimum considered for this study was 40%. More than half of the indicators were found to have no significant predictive power and, to eliminate unnecessary work, were dropped out halfway through the research. The remaining indicators were evaluated empirically and statistically, and the best were included in a MetaStock system test. Indicator parameters were optimized in further out-of-sample testing. Any recognizable formations and their duration were also noted. The system was then tested on 100 penny stocks.