Fundamental Research vs. Technical Analysis

Fundamental Research vs. Technical Analysis

What is more important when trading penny stocks:  fundamental research or technical analysis?  I use technical analysis primarily and only use fundamental research to narrow down  a choice of candidates that I have been following.

Remember what we are trading.  We are trading penny stocks.   That being the case, we will not find too many candidates that will stand out to us using fundamental analysis.  The reason that the stock is trading at less than $5 is because there is not something too promising with the fundamentals of the company.  It may be merely a difficult time that a company is going through but despite how much you research the stock or the marketplace you will not get the real picture.

I have watched a few sites over the years that attempt to apply fundamental research to penny stocks.  It is almost humorous.  I have been impressed with some of the research that they have put out there.  It has been good stuff.  Sometimes it has been so good that it almost convinced me to trade the penny stock myself, however, ultimately the stock languishes again.  I have seen some of the greatest fundamental research write-ups on companies that are now defunct.  And frankly I could care less.  I believe fundamental research on penny stocks is a loser’s game.  It will not lead you anywhere positive.

I prefer technical analysis.  I am talking about breakouts above trendlines, moving averages, moneyflow, relative strength, stochastics, MACD, and the like.  I find that techincal analysis is much more beneficial when it comes to penny stocks trading.
Technical analysis is sort of a measure of whether a stock is in favor or out of favor during the particular time frame that you happen to be watching for.  It does not give you an indication of where  the stock might be going 6 months or one year from now.  It lets you know whether the stock is in favor right now.  And simply put if it is in favor right now then I want to trade it.  If it is out of favor then I want to stay away from it or short it.  As an aside, I work in the investment industry and the SEC is beginning to get tougher with short sale rules.  As a result of this I would spend most of my time looking to go long in the particular penny stock that you might be trading.  I think it may be hard for many brokerage companies to come up with the physical shares of the company to short.  The SEC is starting to require that the brokerage company locate the shares.

If technical analysis indicates that a company may be in favor at this time then it becomes a penny stock trading opportunity.  I would stay in the trade for as long as the technical indicators are in your favor or exit the trade according to your trading rules that you have set up.   When you have exited the trade you can always look to re-enter the same stock for yet another trade or move on to another penny stock to trade.

Below is a chart of BRCD (Brocade Communications) over the last month. Take a brief look at how the stock drops to around $3 and then rises again to at least $3.30 again.

BRCD - Last Month

Three different times in the last month you could have bought near $3.00 and then sold again at $3.30 or higher. And if you will look at the far right of the chart you will see that it is there again. Maybe it could be a buy again. Watch it over the next few days and see what happens. Learn technical analysis and put it to work in your penny stock trading.