A Definition of Penny Stocks
The best definition for penny stocks in the stock market comes from the Securities and Exchange Commission. According to the SEC, the term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies. To quote the SEC: "Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter. The Securities and Exchange Commission goes on to warn that, "Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in these stocks should be prepared for the possibility that they may lose their whole investment." This is not, nor ever will be, something a senior citizen wants to do with there retirement investing nor an investment for the causal investor.

Now you can see the fear factor but what is the attraction that can even draw in successful traders? For many people, penny stocks are Las Vegas, the lottery and the pot of gold at the end of the rainbow all rolled into one. For every average guy (or girl) that can’t buy Google stock at $500 or more per share, there are millions that can buy 5,000 shares of MEW Industries at $0.15 per share. Is MEW Industries going to make money? What do they make? Will they even still be in business tomorrow? Like plunking $3 into a slot machine or buying that lottery ticket with all of your favorite numbers, penny stocks give everyone the chance to make it big. The opportunity to turn your 5,000 shares of MEW Industries from a $0.15 stock to a $100 is just to appealing to most people as finding their way to the nearest casino.

The Risks Of Penny Stocks
Quite simply, the ultimate risk with penny stocks is that you can lose your entire investment; that statement right there should wake you up a bit! The risk to reward ratio for these stocks shows that while the possibility of great reward is there, the risk is very great as well. Lack of information to perform technical analysis, financial instability of the companies and scam artists all make penny stocks a virtual minefield of investing. Remember that after its fall from grace, WorldCom actually traded as a penny stock for a while and people actually bought it! In addition, using tricks like the “pump and dump,” unscrupulous traders with try to falsely lure investors with promises of a tremendous growth in a stock at which time they dump their shares for a large profit and leave the other investors holding the bag.

The Key To Investing In Penny Stocks
If you want to take a shot at it investing in penny stocks, caution has to be your rule. First, don’t invest more than you can comfortably afford to lose and that doesn’t mean emptying your account with your broker! Select a reasonable amount as your risk premium. Second, make sure your trading plan is up to date and reflects the dangers of this type of investing. Finally, learn before you invest! This is always true but more so when you are dealing with a marginal form of investing. Find companies that you can actually research and you will do much better.

Conclusion
Penny stocks are not for everyone. As appealing as they might be, the risks involved require that an investor dig into the data to protect him or herself from the associated stock volatility. So do your research, chart your targets, rub your lucky rabbit’s foot and proceed with caution! Penny stocks can take you on a very exciting ride!

Market Direction: Candlestick signals combined with other technical indicators greatly improve an investor's ability to analyze a trend. A signal itself provides the indication of what could be changing in investor sentiment. That information needs to be applied to the nature of a trend. As seen in the chart of the Dow, the moving averages provided significant analytical information. The Tee line produced relevant support and resistance over the past few months. This past week, the recommendation to start taking profits in the long positions, and adding some short positions, was based upon a very simple candlestick analysis.

After a few days of indecisive trading, a Bearish Engulfing signal appeared. Any time you witness a few sessions of indecisive trading that is eventually followed by a Bearish Engulfing signal, the implication becomes obvious. The bears decided to take control. When the Bearish Engulfing signal closed right on the Tee line, further evaluation is required. Is the Tee line going to act as support, as it had for the past few months? The following trading day formed a Bullish Harami. This could have been a good signal to indicate that the Tee line was going to continue to act as support. What was needed to confirm a Bullish Harami? Positive trading the following day!

However, the analysis was that if prices came back down through the open of the Bullish Harami signal, a completely different scenario would be in place. What would be the ramifications of the Dow coming back down through that level? Number one, it was not confirmation needed for the Bullish Harami. Number two, it would have violated the Tee line that had been acting as support. Those two facets would now be confirming the information produced by the Bearish Engulfing signal.

The combination of these elements, especially with  trading back down below the Tee line, now becomes a better visual picture that the bears were starting to take control. What had been acting as support was not continuing to act as support. The downtrend was in progress. Knowing that, the fact that the Tee line could not be breached again to the upside provided further evidence to continue to stay short. Candlestick signals produce high probabilities of a reversal. Adding additional technical indicators to your analysis creates a visual format that makes trend analysis much easier to project.

DOW

Bullish Harami's have much greater influence when stochastics are in the oversold condition.  The bullish trading on Monday created a Bullish Harami in both the Dow and the NASDAQ. This has more credibility for indicating a downtrend may be over.    

Commodity trading - The Candlestick Forum provides an extensive training CD for projecting potential price targets utilizing candlestick analysis. Applying the simple logic to the analysis of a projected target allows an investor to utilize candlesticks to better identify when to continue to hold and when to take profits. These techniques work very well when applied to stock trading. However, there should be some modification for utilizing price targets when trading commodities and currencies. Because of the leveraged characteristics of commodities, a price target should be acted upon in a different manner versus stock prices.

Because profits can be very fleeting when trading commodities, a different parameter should be applied. Because of the slower nature of price moves in stock prices, there is more time to analyze what investor sentiment is doing once a price has reached a potential target. Commodities, on the other hand, can move dramatically to get to a price target as well as moving away from a price target. This is illustrated in Mr. Bigalow's December Oats trade this past week.

The bottoming signal, a small Bullish Engulfing signal after a Hammer signal in the oversold condition, created the entry to this trade. What was the potential target? The 50 day moving average was likely the first target. A breach of that level made filling the gap the next viable target. As witnessed, after entering this trade, there was a very strong price move up through the 50 day moving average, filling the gap, and testing the last little peak before the downtrend. At that level, what type of candle was created? A large bullish candle. Would that have been any indication to sell? No. But what should have been the evaluation of this trade at that level?

Dec. OATS

First, there was very good profits. Secondly, there was a large price move, much greater than the normal price move seen on a daily basis in the normal trading of December Oats. Third, it had moved to a resistance level that should have been obvious to everybody. Is it time to sell? Not on a candlestick signal basis, but it has fulfilled the expectations of why the trade was put on. This price move occurred early in the day. A prudent trading practice would be to take off at least half a position. Put those profits in your pocket. If the price continues higher from this level, you will still be making money on the remaining half of your position that is now in a higher risk area. If the price backs off by the end of the day, you can close out the position and still have some good profits in your pocket.

The old adage in commodity trading is that if you can be correct on 55% of your trades, you will make a fortune. Candlestick signals help put those probabilities in your favor. Utilizing some simple trading rules will allow you to retain the profits the signals produce.

There will be a Members Stock Chat tonight at 8PM ET.

Good investing,

The Candlestick Forum Team

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