Technical Analysis for OTC Stocks
Technical analysis, the statistical study of price movement, is one of the most common methods used to evaluate large stocks. Unfortunately, limited volume and large spreads make technical analysis somewhat difficult when it comes to OTC stocks. Regardless, there are several techniques that remain effective and can help investors select winning OTC stocks. This article will go over both the theory and application of these technical analysis techniques.
A Technical Analysis Primer
Technical analysis is defined as the statistical study of price movement in an attempt to predict future movements. The theory is that market psychology tends to repeat itself and can be interpreted through a variety of different tools. These include methods as simple as moving averages to as complicated as neural network analysis. Each method has its own positives and negatives, and traders must evaluate what works best on a case-by-case basis.
Useful Methods for OTC Stocks
The limited volume and large spreads associated with OTC stocks preclude them for many common technical analysis methods. For example, candlestick predictions may not be accurate if only $100 worth of shares caused the move. Since technical analysis is the study of crowd psychology, it often needs a crowd in order to work effectively. But, here are a few technical techniques that do not require such a crowd to work:
- Long-term Moving Averages – Moving averages take into account price movement over a long period of time, ranging from weeks to months. This long time span effectively “creates a crowd” by combining time periods to create volume. As a result, investors can benefit from looking at 50-day or 200-day moving averages to determine overall trends before investing. One good rule is to invest only when the trend is headed upwards, instead of trying to fight the crowd.
- Weekly Candlesticks – Candlestick analysis can be a telling sign of turnarounds and market trends. Viewing a weekly candlestick chart enables investors to combine volume into meaningful candlesticks that can then be analyzed. The most important candlesticks to watch for are “doji stars,” which look like plus signs, at the beginning or end of large trends. These often signal a turnaround may be around the corner.
- Weekly Trendlines – Trendlines on a weekly chart over a long time period can help to identify key support and resistance levels as well as technical breakouts. The best patterns to look for are ascending and descending triangles with the price approaching a breakout. For example, a breakout to the upside of an ascending triangle could signal a rally, while a breakdown of a descending triangle could spell trouble ahead.
- Support and Resistance – Support and resistance levels can be extremely good predictors of how far an OTC stock will rally or fall. However, it is important for traders to (1) look at the long-term charts when finding these levels and (2) be sure that there is a lot of volume at these levels in order to gauge the strength of the levels.
Other Tips for Analyzing OTC Stocks
- Look at the Dollar Volume – Technical traders should always look at the volume in order to determine which timeframe to use for their charts. High volume OTC stocks can use shorter timeframes, while low volume OTC stocks should use incrementally longer timeframes. Also, be sure to look at the dollar volume as high volume in a $0.0001 stock doesn’t mean as much as high volume in a $0.10 stock.
- Trade with the Trend – Technical traders should always make sure that they are trading along with the prevailing trend. Only look to buy when short-term buy signals align with long-term bullish trends. Never try to catch a falling knife or get caught holding onto a losing stock over the long-term, especially in the OTC markets.
- Sell Into a Rally – It is much better to get out too early than to get out too late. OTC stocks tend to breakout very quickly only to fall back to earth just as quickly. As a result, it is very important to buy ahead of an anticipated breakout and sell on the breakout, instead of buying after a breakout and trying to sell later. Also, unlike regular stocks, it’s not always a good idea to let profits run when dealing with OTC stocks.
- Always remember, you need a crowd for technical analysis to work.
Conclusions
Technical analysis can be effectively applied to OTC stocks, but there are several important things that must be considered. The two take-away things to remember are to look at the dollar volume behind the patterns and to take profits early and often instead of letting them run.
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com